ECON 0280 Assignment 2

ECON 0280 Assignment 2 - ECON 0280 Money and Banking...

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ECON 0280 Money and Banking Out-of-Class Assignment 2 Summer 2009 Due: Beginning of lecture on Tuesday 16 th June Length: Approx. 2 pages, 1.5 line spacing and size 12 font Assignment: Latvia is presently experiencing one of the worst depressions in the world, with the potential to create a large contagion effect in both eastern Europe as well as western banks that have lent considerable funds to Latvians during their recent bubble economy. Write an essay discussing the problems of the Latvian economy. A sensible essay would discuss issues such as: -A brief overview of the growth bubble and subsequent burst (e.g. changes in GDP growth, unemployment, asset prices, etc.) -The problems associated with attempting to maintain a fixed exchange rate with the euro. Latvia is member of the European Union and in order to eventually adopt the euro they have pegged their currency to the euro. Maintaining this peg prevents the Latvian currency from depreciating to help restore competitiveness. However, due to the currency peg, many Latvians borrowed in euros. This means that if the Latvian currency devalues relative to the euro, it will take them more of their money (which is obviously the currency in which their pay is earned) to pay back a debt in euros. -The potential effect of these problems on western banks that have lent heavily in Latvia (particularly Swedish and Swiss banks). You should discuss how defaults due to both rising unemployment, as well as the potential for a devaluation that leaves Latvians unable to pay back euro-denominated debts, will affect these banks. A proper bibliography is required. Some sources you may find useful are below (on the file on courseweb), although you should look for additional information on your own.
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Latvia’s currency crisis is a rerun of Argentina’s” By Nouriel Roubini Relief in Latvia spreads across the water (Do a quick search for Latvia on the FT and you will find lots more. Bloomberg is usually a good source as well.) The text below is a copy of an email I received yesterday from Nouriel Roubini’s Roubini Global Economic Monitor, and should be cited as such. RGE Monitor's Newsletter Is Eastern Europe on the Brink of an Asia-Style Crisis? The collapse of the Thai baht in July 1997 helped spark the Asian financial crisis. Could events in Latvia spawn a similar contagion? Eyes are focused on this small Baltic economy, amid growing talk of a devaluation, due to the potential for spillover effects into its fellow Baltics, Sweden and the broader Eastern European region. Strong trade and financial linkages, not to mention similar macroeconomic
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ECON 0280 Assignment 2 - ECON 0280 Money and Banking...

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