As a result, the deficit countries built up ever-larger external liabilities. However, large external debts, especially when funded through short-term financing, can exacerbate existing national dysfunctions and vulnerabilities. This is precisely what happened in some peripheral euro-area countries during the current crisis: they could no longer finance their deficits through private capital inflows, requiring macroeconomic rebalancing.
And this is precisely what I would call a balance of payments crisis: a sudden stop in the inflow of private capital that requires a correction of unsustainable developments and policies. The reason for the sudden stop in private capital inflow was a loss in creditors’ confidence in countries’ solvency.