Sovereign Risk, Currency Risk, and Corporate Balance Sheets

We provide a comprehensive account of the evolution of the currency composition of sovereign and corporate external borrowing by emerging markets from 2003 to 2017. We show that a higher reliance on foreign currency debt by the corporate sector is associated with higher sovereign default risk. We in...

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Bibliographic Details
Published in:The Review of financial studies 2022-10, Vol.35 (10), p.4587-4629
Main Authors: Du, Wenxin, Schreger, Jesse
Format: Article
Language:English
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Summary:We provide a comprehensive account of the evolution of the currency composition of sovereign and corporate external borrowing by emerging markets from 2003 to 2017. 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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhac001