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The Currency Denomination Of Sovereign Debt

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  • Michael Bleaney

Abstract

This paper considers the currency composition of sovereign debt in the context of risk-sharing through excusable defaults. It is shown that monetary credibility is not a sufficient condition for borrowing in domestic currency. With real exchange rate risk, debt denominated in a borrowing country’s currency can be too state-contingent to support international lending on purely reputational considerations, even when debt denominated in the lending country’s currency is viable. The model can explain the geographical pattern of bond issuance, the phenomenon of “original sin”, and the concentration of defaults on foreign-currency debt.

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  • Michael Bleaney, 2006. "The Currency Denomination Of Sovereign Debt," Discussion Papers 06/02, University of Nottingham, School of Economics.
    • Handle: RePEc:not:notecp:06/02
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    File URL: https://www.nottingham.ac.uk/economics/documents/discussion-papers/06-02.pdf
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    1. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
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    5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    6. Grossman, Herschel I. & Han, Taejoon, 1999. "Sovereign debt and consumption smoothing," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 149-158, August.
    7. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
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