The potential financial vulnerability that can occur when private sector or government agents acquire high levels of foreign currency debt has been at the center of discussion since the financial crises that affected the countries of Southeast Asia in the late 1990s. To the extent that a mismatch is generated in the denomination of assets and liabilities, foreign currency debt increases agents’ vulnerability to fluctuations in the exchange rate. After a depreciation, the debt-asset ratios increase, interest rates rise in relation to income and access to new debt is limited. For firms in the private sector (especially those that operate in the nontradable sector), these balance sheet effects reduce output and investment and, in extreme cases, lead to the bankruptcy of firms and financial instability.
Attribution-NonCommercial-NoDerivs 3.0 Chile
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