Abstract

We provide a comprehensive account of the evolution of the currency composition of sovereign and corporate external borrowing by emerging markets over the past fifteen years. We show that a higher reliance on foreign currency debt by the corporate sector is associated with higher sovereign default risk. We introduce local currency sovereign debt and private sector 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 sovereign credit risk over the last decade.

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Citation

Du, Wenxin, and Jesse Schreger. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets." Columbia Business School, June 2021.

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