Handbook of Safeguarding Global Financial Stability

Chapter 16

Foreign Currency Debt

M. Chamon

International Monetary Fund, Washington, DC, USA

Outline

Introduction

Risks of Foreign Currency Debt

Reasons for Holding Foreign Currency Debt

Development of Local Bond Markets

Conclusion

References

Introduction

Most foreign lending to developing countries is denominated in foreign currency. As discussed in detail in this chapter, this is undesirable from a risk perspective, and creates financial fragility. The chapter then surveys some of the explanations to why foreign currency debt is chosen despite the risks involved, and the development of local bond markets.

Risks of Foreign Currency Debt

As the exchange rate tends to appreciate when times are good and depreciate when times are bad, denominating ...