Originally published in the June 2009 edition of ‘Finance & Development’ (International Monetary Fund) Latin American companies used new techniques to protect against currency swings. But a few used them to gamble—and lost big. Borrowing in foreign currency can be a double-edged sword for companies in emerging markets. Foreign currency liabilities often give firms the […]
IMF Regional Economic Outlook: “Corporate Vulnerability in Latin America: Have Firms Reduced their Exposure to Currency Risk?”
Foreign currency financing has been a key source of financial vulnerability for companies in Latin America. In the 1990s and early this decade, sharp currency depreciations in several countries in the region drove up the value of firms’ foreign currency debt relative to their assets and income, impairing many firms’ ability to service debt. This, in turn, exacerbated the banking difficulties that many of these countries experienced.