The dangers of foreign currency debt

Some emerging countries have a large proportion of their debt in foreign currencies, even in the recent period. Examples are Mexico (33% of the debt is in foreign currencies), Indonesia (34%), Poland (31%), Hungary (61%), Turkey (43%) and Russia (34%) (1) . When the proportion of debt in foreign currencies is large, currency depreciations have severe negative impacts on the economy, due to the increase in the weight of the debt and interest on the debt. We will illustrate this mechanism in the case of the six countries mentioned above. (1) See M. Chui, E. Kurc, P. Turner (2016): "A new dimension to currency mismatches in the emerging markets: non-financial companies", BIS Working Paper n°550, March