The Original Sin of Emerging Economies
'Original Sin' is a term that expresses the inherent limitations of countries without a reserve currency, first coined by Barry Eichengreen, a professor at UC Berkeley.
It means that in international financial markets, emerging economies raise funds in a foreign currency rather than their own, so when exchange rate fluctuations are severe, they can experience a financial crisis due to a shortage of foreign currency liquidity.
Recently, the Financial Times (FT) of the UK reported that companies in emerging economies are committing original sin by issuing too many foreign currency bonds such as dollar-denominated bonds in the low-interest-rate environment.
Last year, the amount of foreign currency bonds sold by emerging market companies and banks reached $300 billion (about 326 trillion won), setting an all-time high. This year, issuance by emerging market companies is expected to grow to twice last year's level.
The problem is that if the value of emerging market currencies falls, a large amount of foreign-currency-denominated bond issuance increases the financial burden on these companies, eventually leading to bankruptcy.
For example, during the 2008 financial crisis, the Mexican peso, Brazilian real, Turkish lira, and South Korean won fell by at least about 20% against the dollar. As a result, some companies faced growing foreign debt burdens and had to undergo restructuring. East Asian countries with high dependence on dollar-denominated bonds in the 1990s also experienced foreign exchange crises due to the collapse of their currency values.
If a country with a non-reserve currency wants to make facility investments
Emerging economy -> borrows dollars -> converts to local currency -> facility investment
Here, borrowing dollars becomes the biggest problem
When a crisis occurs, each country must repay its dollar debts (= IMF crisis)
Topics: Key currency,Dollar,sheep shearing
Category: Wiki/Economy