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What are twin crises?

Twin crises

Twin crises is a phenomenon that refers to the simultaneous collapse of the banking system and currency in a country. The term was introduced in the late 1990s by economists Graciela Kaminsky and Carmen Reinhart after several such events occurred around the world.

Where have you heard about twin crises?

The 1994 ‘Tequila’ crisis in Mexico, followed by the 1997 Asian financial crisis and 1998 Russian ruble crisis sparked a huge discussion among economists on the close relationship between banking and currency devaluation.

What you need to know about twin crises.

Kaminsky and Reinhart studied 20 countries over 25 years and found that not only are banking problems generally followed by a currency crisis, they also help to predict them.

In the case of the Asian crisis in particular, the vulnerability of the financial system arose from a currency mismatch on the balance sheets of domestic borrowers.

Domestic financial institutions would borrow in a foreign currency with a lower interest rate, and lend in the domestic currency at a higher interest rate. A fixed exchange rate was profitable for the banks, but made them vulnerable to a devaluation of the domestic currency.

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