Three Models of Financial Crises

Since the 1980s, external financial crises have followed one of three basic forms: the Latin American, the Asian Financial Crisis (AFC), or the Global Financial Crisis (GFC) model.

Latin American Debt Crisis

In the Latin American debt crisis, governments went on spending with foreign borrowings while pegging their exchange rates. The spending led to large current account deficits that eventually proved difficult to finance, and finally defaults on the foreign borrowing. The Indian external crisis of 1991 belonged to this category, although the country did not and has never defaulted.

The Asian Financial Crisis (AFC)

In the AFC of the late 1990s, Asian economies witnessed unsustainable external positions under fixed exchange rates. Here it was due to private borrowing rather than government borrowing. The troubles in Eastern Europe in 2008 belonged to this category.

The Global Financial Crisis (GFC)

The GFC of 2008, with America as its epicentre, was unique in that it involved a systemically important country and originated in doubts about its financial system. The effects radiated out globally. The origin of the GFC was due to excess consumer borrowing.