Currency Board and Debt Trap: Evidence from Argentina and Relevance for Estonia
This paper analyses the November 2000 liquidity crisis that brought Argentina near default on its foreign debt. The main purpose of this paper is to assess whether this crisis may be taken as a warning signal for Estonia, given the similar exchange-rate system shared by the two countries. It seems that with a low level of public debt and a balanced budget, Estonia will not face a similar liquidity crisis as its Latin American counterpart, which remained heavily reliant on foreign borrowings. But the substantial real exchange-rate appreciation of the kroon under the Currency-Board Arrangement has resulted into serious external imbalances, which will need to be corrected to avoid balance of payments pressure and reduce Estonia’s high dependency on the level of foreign direct investments. Classification-JEL:
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