Abstract
The phenomenon of financial market crises—the lasting disturbances in the capital markets—emerges in the form of banking crises, external debt crises and currency crises or in all of these at more or less the same time—these different forms are interlinked with one another which have their origin in one particular country and tend to spread to other countries. This is not a new one and is called in modern terminology ‘contagion’ a term that has been re-coined from the earlier ‘international propagation’ as coined by Charles Kindleberger in his classic of 1978, Manias, Panics, and Crashes. The more the interdependence among the countries in trade or exposure to common macroeconomic factors, the greater will be the contagion, while the main sources of it can be traced in common financial linkages, pathologies in the diffusion of information among the agents and, finally, financial fragility that underlies international contagion: rapid inflows of capital, macroeconomic shocks that occur too rapidly for gradual portfolio rebalancing and a leveraged common creditor. The present chapter in this context endeavours to have a look back and forward into the generation of so many financial market crises. Capital flows into emerging economies have grown twice as fast as those into developed economies since the 1990s. Over time, there have been notable changes in the form and nature of international capital flows. The first important trend is that the vast majority of these flows are driven by portfolio investment. A second trend is the rise in private capital flows. Private capital flows represented more than 80 % of all flows in 2011. A third trend is the increasing integration of developing states into global financial markets. These states have become an important destination for global capital. Larger capital flows meant larger current account deficits, given the difficulty of sterilizing these inflows, and real exchange rate appreciation. Both the deficits and the large real appreciation are sources of vulnerability when financial market conditions are disturbed. In the first place in this chapter, we recall early financial market crises in economic history which helps us to understand more about the contagion processes observed in more recent years. In the following section, our aim is to picture the important events that occurred in Chile in 1982, crisis of the exchange rate mechanism (ERM) during the early 1990s, the Mexican crisis of 1994–1995. Last of all, we provide a chronicle of the more recent crisis of 1997–1998 in Thailand and the subsequent turmoil in many Asian economies as well as global economic meltdown and the Eurozone crisis of recent years and their implications for India. The chapter ends with a conclusion.
There have been big changes in the contours of the global economic map. But the fact remains that the actual extent of global shifts in economic activity is extremely uneven. Only a small number of developing countries have experienced substantial economic growth; a good many are in deep financial difficulty whilst others are at, or even beyond, the margins of survival…although we can indeed think in terms of a new international division of labours, its extent is far more limited than is something claimed.P. Dicken in Global Shift
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Since 2000, carry trade has become one of the important phenomena. This is a speculation based on borrowing funds in a country with a low interest rate and investing the funds in a country with a higher interest rate. As long as the exchange rate for the two currencies involved in carry trade is not fixed irrevocably, the carry trader bears exchange rate risk fully according to the equation: \(i\,=\,i*\,+\,\left( {{E}^{e}}-\text{ }E \right)/E.100\), where i and i* represent the domestic and the foreign interest rates (in percentages). E e is the expected exchange rate, while E is the exchange rate on the spot exchange market in terms of the domestic currency price of the foreign currency. In the event of carry trade, the Left Hand Side (LHS) expresses the borrowing costs, while the Right Hand Side (RHS) shows the return on lending, including the expected exchange rate profit (which can, of course, be negative). One of the most popular channels for carry trade in the past few years has been borrowing in Japan (with quite low interest rate) and lending in Australia (with relative high interest rate). In the summer of 2007, when Japan increased its interest rate, part of the carry trade was stopped.
References
Bank of England (2011) The future of international capital flows. Bank of England Financial Stability Paper, December 2011
Burnside C, Eichenbaum M, Rebelo S (2001) Prospective deficits and the Asian currency crisis. J Polit Econ 109:1155–1198
Calvo G (1998) Capital flows and capital market crises: the simple economics of sudden stops. J Appl Econ 1(1):35–54
Calvo G, Izquierdo A, Mejia L (2004) On the empirics of sudden stops: the relevance of balance-sheet effects. Working PaperNo.10520: Cambridge, MA: NBER
Calvo G, Mendoza E (1996) Mexico’s balance-of-payments crisis: a chronicle of a death foretold. J Int Econ 41:235–264
Chancellor E (2000) Devil take the hindmost: a history of financial speculation. Penguin, New York
Chatterjee B, Karmakar AK (eds) (2011) Capital account convertibility in India. Deep and Deep Publications, New Delhi
Corsetti G, Mackowiak B (2006) Fiscal imbalances and the dynamics of currency crises. Eur Econ Rev 50:1317–1335
Craig D, Porter DR (2005) Development beyond neoliberalism? The poverty reduction paradigm. Roultledge, London
Dicken P (2011) Global shift: mapping the changing contours of the world economy, 6th edition. Sage Publications Ltd, London
Edwards S (2004) Financial openness, sudden stops and current account reversals. Am Econ Rev 94(2):59–64
Fergusan YH, Mansbach RW (2012) Globalization: the return of borders to a borderless world? Roultledge, New York
Frankel J (1999) No single currency regime is right for all countries at all times, Princeton Essays in International Finance No. 215 (August)
Gills BK (ed) (2011) Globalization in crisis. Roultledge, London
Glick R, Hutchison M (2001) Banking & currency crises: how common are twins? In: Glick R, Moreno R, Spiegel M (eds) Financial crises in emerging markets. Cambridge University Press, Cambridge, pp 35–69
Glick R, Moreno R, Spiegel MM (eds) (2001) Financial crises in emerging markets. Cambridge University Press, Cambridge
Godement F (2002) The downsizing of Asia. Routledge, London
Goldstein M (1998) The Asian financial crisis: causes, cures, and systemic implications. Institute for International Economics, Washington, D.C.
Grabel I (2003) International private capital flows and developing countries. In: Chang H-J (ed) Rethinking development economics. Wimbledon Publishing Company, London
Grupen N (1986) The debt crisis in Latin America. Institute of Latin American Studies, Stockholm
Hutchison M, Noy I (2005) How band are twins? Output costs of currency and banking crisis. JMCB 37(4):725–52
International Monetary Fund (2010) World economic outlook update: a policy-driven multi-speed recovery. January 26, 2010
Kaminsky GL, Reinhart CM (1999) The twin crises: the causes of banking and balance of payments problems. Am Econ Rev 89(3):473–500
Karmakar AK (2010) Balance of payments theory and policy: the Indian experience. Deep and Deep Publications, New Delhi
Karmakar AK, Mukhopadhyay D (2011) Macroeconomics of exchange rate management in developing countries with special reference to India. Artha Beekshan 20(2–3):42–63 (September and October)
Karmakar AK (2011) Global financial meltdown and the Indian economy. In: Sen RK (ed) Modern Indian economy. Deep and Deep Publications, New Delhi
Karmakar AK (2012) Capital flows and financial crises. Artha Beekshan 20(4):77–93 (March)
Kindleberger CP, Aliber RJ (2011) Manias, panics and crashes: a history of financial crises, 6th edn. Palgrave McMillan, Basingstoke
Krugman P (1979) A model of balance of payments crises. JMCB 11:311–325
Krugman P (1998) What happened to Asia? http://web.mit.edu/www/DISINTER.html (January, 1998)
Krugman P (2008) The return of depression economics and the crisis of 2008. Penguin Books, Harmondsworth
McKinnon R, Pill H (1995) Credible liberalizations and international flows: the overborrowing syndrome. In: Ito T, Krueger A (eds) Financial deregulation and integration in East Asia. University of Chicago Press, Chicago
McKinnon R, Pill H (1999) Exchange-rate regimes for emerging markets: moral hazard & international overborrowing. OXREP 15(3):19–38
Obstfeld M (1986) Rational and self-fulfilling balance of payments crises. Am Econ Rev 76:72–81
Obstfeld M (1994) The logic of currency crises. Cashiers Economiques et Monetaries 43:189–213
Scott-Quin B (2012) Commercial and investment banking and international credit and capital markets. Palgrave Macmillan, London
Sheng A (2009) From Asian to global financial crisis: an Asian regulator’s view of unfettered finance in the 1990s and 2000s. Cambridge University Press, Cambridge
Walters A (1986) Britain’s economic renaissance: Margaret Thatcher’s reforms, 1979–1984. Oxford University Press, Oxford
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer India
About this chapter
Cite this chapter
Karmakar, A. (2014). Contagious Financial Crises in the Recent Past and Their Implications for India. In: Ghosh, A., Karmakar, A. (eds) Analytical Issues in Trade, Development and Finance. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1650-6_30
Download citation
DOI: https://doi.org/10.1007/978-81-322-1650-6_30
Published:
Publisher Name: Springer, New Delhi
Print ISBN: 978-81-322-1649-0
Online ISBN: 978-81-322-1650-6
eBook Packages: Business and EconomicsEconomics and Finance (R0)