Finnish Markka

Finnish Markka

Grosman achard martin

1. For the Finnish government, exchange rate is of great importance. They pegged the value of their currency in order to create a strong policy I.e. achieve low inflation and enhance stable pirces. At that time in Finland inflation and nominal income have steadily rose faster than in its competitors. By doing that Finland gave a sign that it would enter soon in European union as well (matching with Maastricht criteria) because under the floating exchange rate regime finland would have faced difficulties maintaining economic stability and low inflation.

2. Finnish markka started to be attack after it pegged the ECU in autumn 91. They did so because they knew that the Finnish central will not be able to maintain the fixed regime and thus the speculators would benefit by borrowing Markka, converting it into some others currency after the unavoidable devaluation convert it again into Markka and earn a substancial profit. In November the Markka was devaluated, in April and September 1992 two speculative attacks occurred again and Finnish government was forced to get back to the floating regime. Markka continued to weaken. It is notable that speculation over a currency occurs mainly when the monetary policy of a country is not credible and it is believed that the central bank have not enough foreign reserves to protect its currency.

3. An issue of great importance for smaller countries is access to the international capital. The Finnish recession in the early 90's was mainly due to indebtedness of private sector, higher asset prices and the collapse of USSR. Because of that the Markka has been seriously devaluated and thus made the acces of foreign capital much more difficult, which was needed at that to stabilize the BOP. The international lendes were afraid of new devaluation and that Finland will be unable to repay the debt.