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Twin Crises

Twin crises refer to the simultaneous occurrence of a banking crisis and a currency crisis within the same economy. A banking crisis involves a collapse of the financial system, leading to bank failures and liquidity shortages, while a currency crisis occurs when a country experiences a sharp depreciation of its currency, often due to a loss of investor confidence. Twin crises are particularly damaging because the two crises feed into each other, exacerbating the economic downturn.

Example

In 1997, several Southeast Asian countries experienced twin crises, as banking collapses coincided with massive currency depreciations, leading to widespread economic turmoil.

Key points

• Occurs when a banking crisis and currency crisis happen simultaneously.

• Both crises reinforce each other, worsening economic conditions.

• Leads to severe financial instability, often requiring international intervention.

Quick Answers to Curious Questions

Twin crises cause severe economic instability as banking failures and currency depreciation feed into each other, leading to sharp recessions or financial collapse.

They often arise from macroeconomic imbalances, high external debt, and loss of investor confidence, triggering both banking sector weaknesses and currency depreciation.

Recovery often requires significant restructuring, international financial assistance, and measures to restore confidence in the banking system and currency.