1/7
The reason developing countries should borrow in their own currencies, and preferably over longer terms, is not because doing so will eliminate the risk of debt crises, vulnerability to external conditions, or other adverse impacts of excessive debt.
ft.com
The reason developing countries should borrow in their own currencies, and preferably over longer terms, is not because doing so will eliminate the risk of debt crises, vulnerability to external conditions, or other adverse impacts of excessive debt.
ft.com
2/7
It is because it will reduce financial distress costs. The problem for a developing economy that borrows in dollars (or any external currency) is that this leaves it with a highly inverted balance sheet, in which the two sides of the balance sheet are inversely correlated.
It is because it will reduce financial distress costs. The problem for a developing economy that borrows in dollars (or any external currency) is that this leaves it with a highly inverted balance sheet, in which the two sides of the balance sheet are inversely correlated.
3/7
Among other things, debt-servicing costs will be maximized precisely when the economy is doing worst, and minimized when it is doing best. The consequence is automatically to make an economy that probably already suffers from excess volatility even more volatile.
Among other things, debt-servicing costs will be maximized precisely when the economy is doing worst, and minimized when it is doing best. The consequence is automatically to make an economy that probably already suffers from excess volatility even more volatile.
4/7
Because volatility itself creates financial distress costs β which include disincentives for investment, erratic politics, labor conflicts, weak spending, foreign currency hoarding, and so on β inverted balance sheets worsen the economic outlook for developing economies.
Because volatility itself creates financial distress costs β which include disincentives for investment, erratic politics, labor conflicts, weak spending, foreign currency hoarding, and so on β inverted balance sheets worsen the economic outlook for developing economies.
5/7
When a country borrows mainly in its own currency, inversion isnβt eliminated, but it is substantially reduced. Among other effects the real cost of the debt rises when inflation is low and the economy strong, and declines as inflations rises.
When a country borrows mainly in its own currency, inversion isnβt eliminated, but it is substantially reduced. Among other effects the real cost of the debt rises when inflation is low and the economy strong, and declines as inflations rises.
6/7
This helps dissipate volatility rather than enhance it. Of course, if the country relies heavily on foreign capital, it will still be sensitive to external conditions, even if foreign investment were mostly in the form of equity, but this sensitivity would be much lower.
This helps dissipate volatility rather than enhance it. Of course, if the country relies heavily on foreign capital, it will still be sensitive to external conditions, even if foreign investment were mostly in the form of equity, but this sensitivity would be much lower.
7/7
"This is about risk amelioration, not elimination," Wigglesworth notes in this piece, and that is the point. Local currency debt partially dissipates volatility, and reducing operational volatility in a developing economy is likely to advance its development.
@RobinWigg
"This is about risk amelioration, not elimination," Wigglesworth notes in this piece, and that is the point. Local currency debt partially dissipates volatility, and reducing operational volatility in a developing economy is likely to advance its development.
@RobinWigg
Loading suggestions...