Can crises be prevented? The answer is that they can and this paper presents a very simple approach. What is a crisis? Where does it come from? How does it develop? As outsiders, we view a crisis in terms of an inability to continue the usual transactions with other countries, including difficulties in importing, exporting, paying the debt and other obligations, and obviously, difficulties in borrowing new funds. That is to say, a country in crisis lacks foreign currency to meet its international obligations and to undertake international trade. Interest payments on public debt, are probably the first to stop, followed by any principal payments falling due in the same period. If there is a very critical lack of foreign currency, not even the private sector is able to meet its financial obligations. Then, any pending disbursements of loans due are usually interrupted, and letters of credit are immediately suspended, which worsens the situation, following which even the flow of goods and services becomes seriously disrupted. What follows is well known. Emergency, and usually desperate, measures are taken, beginning with the introduction of exchange controls and/or multiple exchange rates in order to attempt an emergency allocation of the scarce reserves.
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