CGD Trap

From Hobson's Choice

CGD stands for currency, growth, and debt.

By December 1999, however, the Argentine economy was caught in a currency-growth-debt (CGD) trap. The currency was overvalued, growth was faltering, and the debt was hard to service [...]. The macroeconomic stance deteriorated sharply in 2001. Doubts about the one-to-one peg to the dollar soared [...] At the same time, uncertainty about the debt component of the CGD trap grew as the government, instead of attempting an orderly debt reduction, postponed the impending crisis temporarily by absorbing the liquidity of banks and pension funds, rendering the banking system less liquid and more exposed to a government default. As financing sources run out, the threat of money printing became a growing concern, and ultimately a reality through the issuance of small denomination government bonds that differed from currency only formally. This, in turn, added to the misgivings about the margin to preserve the currency board. In the process, debt sustainability and bank solvency became intimately linked to the fate of the currency. The elements of this CGD trap (continued economic contraction, increasing default risk, and uncertainty about the exchange rate) reinforced each other. This led to a massive run on bank deposits.^[1]

The CGD trap is actually an old problem, in which a slowdown in growth causes a run on the banks, then a run on the national currency; it caused several depressions in the USA during the 19th century.

Nearly all uses of the term are in the context of Argentina.

[edit]