1890 The Baring Crisis
Panic of 1890: The Baring Crisis
The Baring Crisis was a unique panic happened in Argentina during 1890 as it was related to sovereign debt. This financial crisis was not just affecting the country, but it was also affected some European countries like England and France. The name of the crisis itself came from one of the largest merchant bank in England, Baring Brothers & Co. Before the crisis happened, Argentina attracted a huge amount of foreign investors to invest and loan money to them. They got a large capital inflow through the foreign investors and used the money they had to finance long-term investment projects in infrastructure (Mitchener & Weidenmier, 2006). Everything worked so fine for Argentina until the government passed the Law of National Guaranteed Banks on 1887. This law gave permit to the banks to issue paper notes while the government gold bonds backed this act. This gave confidence for the foreign investors to invest more in Argentine bonds as the gold bonds …show more content…
That was because Baring Brothers & Co. located in London and they invested a lot of money in Argentine securities. They had high confidence that the investment that they make will give them a lot of return. Without any proper monitor on Argentine government’s fiscal policy, the Baring bank risked its market position and possibility of default was higher (Flores, 2006). Moral hazard in within Argentine government worsened the situation for the Baring bank. It just the matter of time for the bank to default, but the Bank of England came into rescue. They intervened this situation by pooling resources from the Bank of France, Russia’s central bank and British financial institution to form a rescue funds. This fund was meant to save the troubled financial institution from bringing down British financial market (Mitchener & Weidenmier, 2006) (Mitchener & Weidenmier,
The Baring Crisis was a unique panic happened in Argentina during 1890 as it was related to sovereign debt. This financial crisis was not just affecting the country, but it was also affected some European countries like England and France. The name of the crisis itself came from one of the largest merchant bank in England, Baring Brothers & Co. Before the crisis happened, Argentina attracted a huge amount of foreign investors to invest and loan money to them. They got a large capital inflow through the foreign investors and used the money they had to finance long-term investment projects in infrastructure (Mitchener & Weidenmier, 2006). Everything worked so fine for Argentina until the government passed the Law of National Guaranteed Banks on 1887. This law gave permit to the banks to issue paper notes while the government gold bonds backed this act. This gave confidence for the foreign investors to invest more in Argentine bonds as the gold bonds …show more content…
That was because Baring Brothers & Co. located in London and they invested a lot of money in Argentine securities. They had high confidence that the investment that they make will give them a lot of return. Without any proper monitor on Argentine government’s fiscal policy, the Baring bank risked its market position and possibility of default was higher (Flores, 2006). Moral hazard in within Argentine government worsened the situation for the Baring bank. It just the matter of time for the bank to default, but the Bank of England came into rescue. They intervened this situation by pooling resources from the Bank of France, Russia’s central bank and British financial institution to form a rescue funds. This fund was meant to save the troubled financial institution from bringing down British financial market (Mitchener & Weidenmier, 2006) (Mitchener & Weidenmier,