The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997
WEFP Working Paper No. WEF 0001
46 Pages Posted: 11 Oct 2006
Date Written: March 2006
We show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis. Some countries do not suffer from financial fragility despite original sin. Before 1913 British offshoots and Scandinavia afflicted with it avoided financial meltdowns. Today many advanced countries have original sin but few have had crises. In both periods, aggregate balance sheet mismatches are associated with a greater likelihood of a crisis. The evidence suggests that foreign currency debt is dangerous when mis-managed. This is part of the difference between developed countries and emerging markets both of which borrow in foreign currency.
Keywords: Foreign currency debt, financial crises, developing countries, emerging markets
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