Risks, Markets, and Restructurings: Essays on Local Currency Borrowing

Abstract

These essays evaluate the risks, market integration, and role of restructuring for local currency borrowing. Chapter 1 examines the relationship between inflation, credit, and currency risk with local currency borrowing, and its uniqueness to specific subsamples. The results suggest unique links between risk measures and local currency borrowing for emerging markets, affecting potential policy for shifting portfolios towards domestic currency. Chapter 2 examines the decomposition of local currency debt markets. Findings show a decrease in a global market factor and an increase in a market factor specific to emerging or developed markets with rising U.S. Federal Funds rates and tightening of global liquidity. The shared trends indicate that emerging market local currency borrowing has time-varying degrees of distinctiveness with developed markets dependent on global liquidity. Chapter 3 extends a theoretical model of debt servicing decisions with local currency debt by an additional option of preemptive restructuring. Quantitative analysis finds that a restructuring option to the borrower changes the decision path of debt-crisis servicing options away from default and debasement of currency towards restructuring. Additionally, the setting with international organizations such as the IMF is discussed, as are identified benefits to both the borrower and the lender. These results support a global debt-crisis policy focused on preemptive restructuring consistent with previous literature.