Why devaluation isn’t a viable option for Greece: Insights from a small open economy

Venezuela just undertook a massive currency devaluation, re-pegging the bolivar to a rate of 6.3 per U.S. dollar from a previous exchange rate of 4.3 bolivars per dollar. The government also announced that it would shutter the a Venezuelan currency exchange system known as SITME.

MOSCOW – Financial leaders from the world’s 20 biggest economies may have promised not to devalue their currencies to help exports, but the pledge will do little to keep exchange rates stable. While G20 finance ministers and central bank governors can promise not to devalue their currencies directly, there can be no guarantees while central banks are pumping money into economies to make them grow again.

When massive private and public sector debts result in a credit collapse and recession, the efforts to pare down the debt is deflationary.  Measures to inflate our way out of the situation are likely to fail as households are attempting to pay down debt and increase savings, rather than start a new round of debt accumulation.  In addition, financial institutions are willing to lend to only the strongest borrowers, another factor limiting credit expansion.  This is called a "liquidity trap" and is very difficult to extricate ourselves from. 

Late on Friday Venezuela shocked the world when instead of reporting an update on the ailing health of its leader, as many expected it would, it announced the official devaluation of its currency, the Bolivar by nearly 50% against the dollar yet still well below the unofficial black market exchange rate.

Daniel Zurbrügg submits:The recent IMF meeting in Washington ended without any firm results despite intense discussions. There were a few important points on the agenda but probably the most important one was the discussion about the threat that a global currency war is about to break out.

Submitted by Mark Grant, author of Out of the Box,

Luc Laeven, Fabien Valencia, 9 July 2012Do advanced economies have an edge in resolving financial crises? This column shows that the record thus far supports the opposite view, with the average crisis lasting about twice as long as in developing and emerging market economies. It argues that macroeconomic stabilisation policies in advanced countries often delay the necessary financial restructuring.Full Article: The curse of advanced economies in resolving banking crises

By Ulysses de la Torre:After solid gains at the beginning of the year for EGPT, PMNA, GULF and GAF, performance has foundered in no s