Comparative Analysis: European and Asian Balance of Payment Crisis

This report analyzes the balance of payment crises in Europe and Asia. It begins by examining the European debt crisis, which started in Greece in 2010 and spread to other countries like Spain, Italy, and Portugal, attributing the crisis to fiscal mismanagement and reliance on foreign investment. The r...Read More

EUROPEAN AND ASIAN COUNTRY BALANCE OF PAYMENT CRISIS
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ANSWER:
The Euro countries debt crisis started in the year 2010 with Greece and rapidly spread
in other adjoining countries like Spain, Italy and Portugal. Many observers believe that
Greece crisis was due to indefensible fiscal situation and mismanagement of the countries.
While few others believe that the crisis was due to extreme reliance on foreign investment.
Much before 2010, the periphery countries started borrowing funds from abroad for
supporting their housing boom and domestic expenditure. Borrowing countries had to face
extreme alteration pressures when the foreign countries resisted extending further credits. The
consequence of such pressure made them withdraw private capital to invest in their domestic
spending and government to keep in alignment with domestic incomes (Sinn). Although, the
tightening in credit situation of borrowing countries’ economies established considerably less
than expected which is the reason these countries had sustained so far. Many Euro central
banks extended their credit limit as a component of Euro system’s method to manage
payment imbalances between member countries. These balances of payments funding was
divided under several policies to deliver liquidity to borrowing countries commercial banks to
counterbalance the loophole of foreign funding. If these Euro system’s methods would have
not been present, the countries could have faced even steeper recessions due to withdrawal of
foreign funds. Although the borrowing countries followed a standard pattern, and were
supported by Euro banks still its sheer consequences were visible in these countries’. Sharp
fell in currency made exports cheaper in foreign legal tenders. Imports became expensive for
domestic buyers. Typically, the balance of payment crisis made Euro countries suffer painful
retrenchment in domestic spending in both private and public sectors as they had to struggle
to end up their foreign borrowings. In addition to it, the financial system of the countries
faced a massive collapse as all the investors started pulling out their money (Klitgaard).

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In 1997, Asian countries had to face similar kind of balance of payment crisis due to
which the adjoining countries were shaken by persistent banking crisis. The attacks of Thai
Baht in 1997 forced the authorities to dispose the fixed exchange rate systems against US
dollar. The crisis within no time spread in adjoining countries like Indonesia, Philippines,
South Korea and Malaysia. After the attack, both Indonesian and Philippine banks gave up
equivalent amount to the US dollar and introduced a float. Along with it, Malaysian and
Korean fiscal systems fell sharply in international marketplace. The banking crisis forced
Thailand and Indonesian authorities to close many financial institutions. Other countries like
China, Vietnam, Hong Kong and Taiwan were also affected as they suffered critical
deterioration in their competitiveness as compared to other significant countries that faced
depreciation in their currencies (Frenkel). Basically, the whole Asian region had to face
declines in equity prices along with facing closures of financial institutions. Although, many
packages were introduced by government to develop while coordinating with IMF, restoring
investor’s confidence seemed very sturdy. Drop in real estate prices along with reduced
foreign exchange rates made the situation worse. The severe attacks and financial hits in
Asian countries affected economic prospects of the country while showing vulnerable nature
of those countries. The financial imbalances triggered the currency of the affected countries
due to which economic activities and asset prices had to face severe plummet while observing
deficits in foreign exchanges. Budget deficits, foreign indebtedness, decrease in corporate
sector investments and political instability are some of the few factors behind Asian crisis for
which the entire nation had to suffer balance of payment crisis (Corsetti, Pesenti and
Roubini).

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REFERENCES:
Corsetti, Giancarlo, Paolo Pesenti and Nouriel Roubini. What caused the Asian currency and
financial crisis? April 1999.Web. 30 April 2018
<https://www.newyorkfed.org/medialibrary/media/research/economists/pesenti/
whatjapwor.pdf>.
Frenkel, Michael. What explains the Asian balance of payments crisis? — A simple third-
generation approach. 2000.Web. 30 April 2018
<https://link.springer.com/chapter/10.1007%2F978-3-642-57674-4_7>.
Klitgaard, Matthew Higgins and Thomas. The Balance of Payments Crisis in the Euro Area
Periphery. 02 Nov 2014.Web. 30 April 2018
<http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.642.3751&rep=rep1&type=pdf>.
Sinn, Hans-Werner. THE EUROPEAN BALANCE OF PAYMENTS CRISIS. Jan
2012.Web. 30 April 2018 <https://www.cesifo-group.de/DocDL/Forum-Sonderheft-
Jan-2012.pdf>.