Most developing countries' banks lost billions because of the dollar devaluation

Discussion in 'Economics' started by crgarcia, Dec 16, 2007.

  1. Developing countries have few investment opportunities, so their banks -be it commercial or national banks- send most of their deposits abroad, usually buying T-Bonds.

    When they return their dollars home, along with the interest earned, they find their currency has appreciated relative to the US$. Sometimes resulting in net losses.

    Fortunately the dollar has not devaluated more, as it could had caused bank runs in developing countries. Another Tequila Effect around the corner?
  2. Buy Patron, sell Cuervo!
  3. "The enfeebled dollar—lately in sight of $1.50 to the euro—would be weaker still without enormous purchases by central banks in emerging economies. This support is now waning. China and others are putting a smaller share of increases in reserves into the American currency. And Asian and Middle Eastern countries with currencies linked to the dollar are facing rising inflation, but falling American interest rates make it harder to tighten their own monetary policy. They may have to let their currencies rise against the sickly greenback, meaning they will need to buy fewer dollars. More important, as international investors wake up to the relative weakening of America's economic power, they will surely question why they hold the bulk of their wealth in dollars. The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done. "

    -the economist 11/15/07
  4. Yeah, the economist sure picked that bottom again, didn't they?
  5. I had to look up Tequila Effect. Very interesting bit of history from 1994.
  6. Do not worry. With mass immigration from Mexico we will be South America soon. Maybe little global warming in there. And there you have it. :p

    When will we learn?