But are we sure that our debts are in dollars? Would we know it if the big New York banks had been trying to boost their earnings by selling unhedged dollar puts, in the (probably correct) belief that if they all do this together they do not have a problem, the rest of us have a problem?: Paul Krugman: Opinion | Partying Like It’s 1998 - The New York Times: "Those of us who devoted a lot of time to understanding the Asian financial crisis two decades ago were wondering whether Turkey was going to stage a re-enactment. Sure enough...
...Start with a country that, for whatever reason, became a favorite of foreign lenders, and experienced a large inflow of foreign capital... denominated in foreign currency.... The party comes to an end. It doesn’t matter much what causes a “sudden stop” in foreign lending... domestic events... a rise in U.S. interest rates... a crisis in another country investors see as... similar.... foreign debt has made your economy vulnerable to a death spiral. Loss of confidence causes your currency to drop; this makes it harder to repay debts in foreign currency; this hurts the real economy and further reduces confidence, leading to a further decline in your currency; and so on. The result is that foreign debt explodes as a share of GDP....
How does such a crisis end? If there is no effective policy response... the currency drops and debt... balloons until everyone who can go bankrupt, does. At that point the weak currency fuels an export boom, and the economy starts a recovery built around huge trade surpluses.... Is there any way to short-circuit this doom loop? Yes... short-run heterodoxy and credible assurances of a longer-run return to orthodoxy... temporary capital controls... repudiation of some [odious] foreign-currency debt... a fiscally sustainable regime once the crisis is over. If all goes well, confidence will gradually return, and you’ll eventually be able to remove the capital controls. Malaysia did this in 1998; South Korea, with U.S. aid, effectively did something like it at the same time, by pressuring banks into maintaining their short-term credit lines. A decade later, Iceland did very well with a combination of capital controls and debt repudiation....
You need a government that is both flexible and responsible, not to mention technically competent enough to implement special measures and honest enough to carry out that implementation without massive corruption. That, unfortunately, doesn’t sound like Erdogan’s Turkey. Of course, it doesn’t sound like Trump’s America, either. So it’s a good thing our debts are in dollars.
#shouldread
