Question

What are the two basic causes of financial crises in emerging market economies?

Short answer

Deteriorating bank balance sheets and massive fiscal imbalances.

Step-by-step solution

 Content Introduction

Financial crisis refers to the situation when the vlue of assets starts declining because of certain reasons. This further leads to panic in the public and a bank run, which worsens the situation.

Explanation

Financial liberalization is widely considered to have widely emerging economies' financial fragility, making them more prone to recurring financial and currency crises. Internal banking and related crises, as well as currency crises produced by more open capital accounts, are all linked to these.

When a government's expenditures (and consequently debt) exceed its long-term ability to generate money to repay the debt, it is said to be in debt. Differences in net fiscal benefits, which are a mix of taxes and government services, result from several types of fiscal imbalances.