Sovereign Risk, Currency Risk, and Corporate Balance Sheets

Wenxin Du and Jesse Schreger

The Review of Financial Studies, 2022, vol. 35, issue 10, 4587-4629

Abstract: 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.

JEL-codes: F31 F33 F34 F41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (19)

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