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Does sovereign risk in local and foreign currency differ?

Marlene Amstad, Frank Packer and Jimmy Shek

Journal of International Money and Finance, 2020, vol. 101, issue C

Abstract: Sovereign debt in local currency has been considered safer than in foreign currency. The literature offers scant guidance as to why such a gap existed, or why it has slowly and steadily diminished over the past two decades. We suggest and empirically test five hypotheses. We find FX reserves, and original sin (greater financing in local currency) to consistently be robust determinants of the gaps in local and foreign currency ratings. As for why the gap has declined, we identify as important factors the surge in global reserves, and to a lesser extent the decline of original sin.

Keywords: Sovereign risk; Local currency debt; Foreign currency debt; Credit ratings (search for similar items in EconPapers)
JEL-codes: F31 F33 F34 F41 H63 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Does sovereign risk in local and foreign currency differ? (2018) Downloads
Working Paper: Does Sovereign Risk in Local and Foreign Currency Differ? (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:101:y:2020:i:c:s0261560618306260

DOI: 10.1016/j.jimonfin.2019.102099

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