 The mechanism is explained by a credit based approach to currency crises, where countries with less developed financial markets experience a sharper output fall during a sudden stop episode, regardless of whether the country has a fixed or floating exchange rate regime, as the source of the crisis is through the deterioration of private firms’ balance sheets.Therefore, a higher proportion of foreign currency debt increases the vulnerability to currency devaluations.Different to first generation crisis models, in their model crises may occur even under low unemployment and sound fiscal policies.