Sovereign Risk, Currency Risk, and Corporate Balance Sheets

68 Pages Posted: 30 Sep 2016

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Jesse Schreger

Harvard Business School

Date Written: September 2016

Abstract

We construct a new dataset of 14 emerging markets and show that sovereigns increasingly borrow from foreigners in local currency but the private sector continues to borrow in foreign currency. We show that a higher reliance on foreign currency corporate financing is associated with more sovereign default risk. We introduce local currency sovereign debt and private currency mismatch into a standard sovereign debt model to examine how the currency composition of corporate borrowing affects the sovereign’s incentive to inflate or default. A calibration of the model generates the empirical patterns of currency and sovereign credit risk over the last decade.

Suggested Citation

Du, Wenxin and Schreger, Jesse, Sovereign Risk, Currency Risk, and Corporate Balance Sheets (September 2016). Harvard Business School BGIE Unit Working Paper No. 17-024. Available at SSRN: https://ssrn.com/abstract=2845428 or http://dx.doi.org/10.2139/ssrn.2845428

Wenxin Du

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Jesse Schreger (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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