Sudden Stops and Liability Dollarization: Evidence from Asia's Financial Intermediaries

Abstract:     
Before the currency crisis of 1997-1998, East Asian financial intermediaries borrowed heavily in international markets. During the crisis, the intermediaries' stock market value declined sharply, and a sizable fraction of the institutions were closed or nationalized. We investigate how the short-term and the foreign-currency nature of the intermediaries' international borrowing contributed to these outcomes. From the impact of long-term international debt on the stock returns of surviving intermediaries, we observe the negative effects of the foreign-currency nature of international debt (liability dollarization). From the impact of short-term international debt on the likelihood of firm failure and on the size of surviving intermediaries' assets and liabilities, we observe the negative effects of the short-term nature of international debt (sudden stops).

Number of Pages in PDF File: 25

Keywords: International Debt, Financial Intermediaries, Liability Dollarization, Sudden Stops, Asian Financial Crisis

JEL Classification: F32, F34, G15, G20

working papers series