Currency crises are among the more predictable events in finance, in the specific and limited sense that the same handful of indicators were flashing beforehand in most of them. The literature that established this, principally the work of Graciela Kaminsky and Carmen Reinhart in the late 1990s on leading indicators, treats the exercise as a signalling problem: each indicator fires when it crosses a threshold, and the count of firing indicators carries more information than any single one.
What are the nine currency crisis indicators?
Nine indicators, with the threshold each is conventionally tested against:
| Indicator | Threshold that fires | What it measures |
|---|---|---|
| Reserves / short-term external debt | below 1.00 | can the country repay a year of maturities with cash |
| Reserves in months of imports | below 3 | can it keep importing if financing stops |
| Current-account deficit, % of GDP | above 5 | how much financing must be found each year |
| Real exchange rate versus its own average | above 10% overvalued | how far the price has drifted from its history |
| Private credit growth minus nominal GDP growth | above 5 points | is a domestic credit boom running |
| Broad money / reserves | above 3 | how much domestic money could try to leave |
| Foreign-currency share of external debt | above 60% | does a devaluation raise the debt burden |
| Fiscal deficit, % of GDP | above 5 | is the sovereign adding to the problem |
| Export growth, year on year | below zero | is the earning capacity deteriorating |
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Worked example: scoring a synthetic emerging market
Score a synthetic emerging market, the Republic of Adaria, on stated data. Reserves are $42.0 billion against short-term external debt of $51.0 billion and monthly imports of $6.4 billion. The current-account deficit is $9.6 billion on GDP of $190.0 billion, and the real effective exchange rate index reads 118.4 against a ten-year average of 104.2. Private credit is growing 21.5% against nominal GDP growth of 9.8%, broad money is $205.0 billion, 71% of external debt is denominated in foreign currency, the fiscal deficit is 4.1% of GDP and exports are growing 6.2%.
| Indicator | Value | Threshold | Fires |
|---|---|---|---|
| Reserves / short-term external debt | 0.8235 | 1.00 | yes |
| Reserves in months of imports | 6.5625 | 3.00 | no |
| Current-account deficit, % of GDP | 5.0526 | 5.00 | yes |
| Real exchange rate deviation, % | 13.6276 | 10.00 | yes |
| Credit growth minus nominal GDP growth, points | 11.7000 | 5.00 | yes |
| Broad money / reserves | 4.8810 | 3.00 | yes |
| Foreign-currency share of external debt, % | 71.0000 | 60.00 | yes |
| Fiscal deficit, % of GDP | 4.1000 | 5.00 | no |
| Export growth, % | 6.2000 | 0.00 | no |
Six of nine fire, 66.666667%. The pattern matters more than the count. Reserve cover in months of imports passes comfortably at 6.5625, which is the number a finance ministry will quote, while the reserve test that actually binds in a rollover crisis, cover of short-term maturities, fails at 0.8235. Import cover assumes the problem is paying for goods. Short-term debt cover assumes the problem is refinancing. In a sudden stop the second one is the problem.
How do you stress-test the scorecard?
Now the part that turns a scorecard into analysis, which is stating what would flip each verdict. Reserves would need to reach $51.0 billion, an increase of $9.0 billion or 21.428571%, to clear the short-term debt test. Alternatively short-term debt would have to fall to $42.0 billion, a reduction of 17.647059%. The current account would need to improve by $0.1 billion to fall under 5% of GDP, which is inside the revision noise of the data and tells you the indicator is barely firing rather than screaming. The real exchange rate would have to fall to 114.62, a 3.192568% real depreciation, to clear its threshold.
And the currency-mismatch indicator is the one that turns a scare into a solvency problem. With total external debt of $118.0 billion, 62.105263% of GDP, of which $83.78 billion is in foreign currency, a 25% devaluation raises the local-currency value of that debt by 11.023684% of GDP overnight. The devaluation that fixes the current account destroys the balance sheet, which is why a country with high foreign-currency debt cannot use the exchange-rate adjustment that the flow accounts are demanding.
What are the limits of the checklist?
Two limits, stated plainly. The thresholds above are conventions drawn from crisis samples rather than laws, and a country can sit below all of them and devalue anyway, or above several and never do so. The whole exercise is also conditional on the data being current and honest, which for the countries where it matters most is exactly the assumption under stress.
A scorecard is a way of organising a question. It is not the answer to one.