I Do What I Do

by Raghuram G. Rajan

The dollarization of liabilities has become widespread in recent years. More and more countries, banks, and firms in emerging markets issue debt denominated in a foreign currency (typically the dollar), even though they don’t have large dollar revenues. When a country’s currency depreciates, the resulting currency mismatch between revenues and obligations can lead to serious consequences – sovereign defaults, banking system meltdowns, and widespread corporate bankruptcy. Given these risks, why do countries persist in borrowing in foreign currencies? One reason – referred to as the ‘original sin’ hypothesis – is that not only do countries not have any choice now but also they can’t do anything about it in the future. Many years ago, the country committed a horrible ‘original sin’ and ever since, investors have feared that country, refusing to accept paper denominated in its currency. In other words, no matter how good the country’s fiscal and monetary situation becomes, it has little hope of escaping the rejection, albeit irrational, of the market