Balance of payment crisis is also known as currency crisis. It is characterized by spontaneous devaluation of currency for a country. This devaluation often affects the foreign exchange market. The crisis arises from persistent imbalances in the balance of payment.
The impact of currency crisis has more effect on a fixed exchange regime than a floating exchange regime. Further, such crisis might have an impact on the foreign reserves of a country thus creating instability in the economy (BBC 1).
An example of a balance of payment crisis is the European sovereign – debt crisis. The Euro crisis is a balance of payment problem that was characterized by a persistent rise in the amount of net debt over several years. The high amounts of net debt led to collapse of the economies within the European region.
The five regions which were adversely affectedare Greece, Portugal, Ireland, Spain and Italy. These countries failed to produce adequate economic growth to repay the debt balances. The debts were in the form of bonds.
It is not only these five countries that felt the negative impact of the Euro crisis but various countries in all the continents suffered the consequences of the Euro crisis. The epitome of the crisis was felt in late 2011. Though the five regions started to feel the impact from late 2008 (BBC 1).
The crisis was instigated by unproductive fiscal policies that were implemented by the governments of these countries. The governments instituted unsustainable fiscal policies. For instance, these countries fund their budget deficits using debt.
This led to the creation of Ponzi scheme hence the large amounts of debt balance and budget deficits. The economies started to experience slow economic growth and reduced tax revenue. In some countries such as Greece, the amount of debt surpassed the magnitude of economy (BBC 1).
The crisis in these countries had a serious impact on the financial institutions. Capital providers started to demandextremely high returns on the amount of capital they invested especially in government bonds. This resulted in an increase in the cost of capital in the countries such as Greece.
Besides, it also resulted in an increase inthe cost of borrowing in these countries. Before the crisis, the banks reported increases in revenue which were not supportable. When the economy of these countries collapsed, banking institutions were the most affected. It is because the banks reported revenues which could not be earned.
Besides, banks that invested massively in bonds of these countries experienced heavy losses. Despite these indications, some countries did not attempt to alter their fiscal policies thus making the situations worse.Countries which changed their fiscal policies felt less consequences than the countries such as Greece and Portugal.
These countries had to receive a bailed out. For instance, Greece was bailed out of the crisis twice. The first bailout amounted to $163 billion in 2011. The second bailout occurred in March in 2012 and it amounted to $157 billion.
The bailwas provided by the International Monetary Fund and European Union. Similarly, countries such as Portugal received bail in 2010 while Ireland received bail in 2011. All the bailwas in the form of restructuringdebts (BBC 1).
Several measures were put in place tostabilize the affected economies in the European regions. First, the European Central Bank bought all the government bonds to ensure that the interest rates stabilize.This initiative was branded Long Term Refinancing Operation.
The initiative saved some countries that had a small amount of debt. The measures that were put in place partly solved the currency crisis. The countries have not fully recovered from the currency crisis (BBC 1).
Works Cited
BBC. Greece in crisis: How European Debt problem affects you. 2013. Web.