Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis

We use Mexican firm-level data to study the role of currency mismatches in the corporate sector in exacerbating the negative effects of a devaluation. We also investigate what drives Mexican firms to borrow in foreign currency. We find that holding dollar denominated debt in a devaluation adversely affects firms’ earnings and investment. However, exporters invested more than non-exporters in the same period. We also find that the negative effect of dollar debt was stronger than the positive effect of exports in the 1994 crisis for firms with positive dollar debt and/or exports, relative to firms that did not borrow abroad and/or export. This was a result of imperfect currency matching by firms. However, in the 1998 crisis firms managed the denominations of their inflows and outflows much better and these two effects were roughly equal in magnitude. We also find some evidence of currency matching by exporters, especially after the introduction of the floating exchange rate.     

Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea

If firms match the currency composition of their liabilities with that of their assets or income, a currency depreciation will have an ambiguous effect on investment of firms holding foreign debt. Using Korean firm-level data, we first find evidence of currency matching. We then show that foreign debt has a significant negative balance sheet effect on firm investment following a depreciation, once foreign assets and exports are controlled for. The balance sheet effect is particularly severe for firms subject to financial constraints. The inclusion of foreign assets is important for identifying the balance sheet effect separately from the competitiveness effect.     

A Study of Codes of Ethics for Mexican Microfinance Institutions

Most scholarly interest in codes of ethics or conduct has focused on traditional companies. Little is known about the codes of social enterprises or hybrid organizations such as microfinance institutions (MFIs). Our paper provides a comparative case study of the codes of a Mexican microfinance network and seven MFIs. Using the corporate integrity model, we analyze the content of MFIs’ codes compared to those of traditional organizations. We then examine to what extent some specific features of MFIs such as their mission, target group, and applied credit methodologies, are factors that determine the content of their code. We find that MFIs’ codes, like those of traditional companies, include traditional stakeholder principles. Nevertheless, they put greater emphasis on ‘socially-oriented’ principles or on terms such as ‘people’ and ‘common good’. MFIs’ codes differ with respect to the items they include and exclude and the size of the covered sections. We also find that these codes attempt to address prevailing concerns in microfinance but rarely tackle two critical debates, namely levels of interest rates and of profitability. We finally argue that it is difficult to move toward a global code, owing to regional disparities and the variety of organizational models and missions.     

Liability dollarization and the bank balance sheet channel

Emerging markets' financial institutions often face a mismatch in the currency denominations of their liabilities (foreign currency-denominated debt raised from foreign lenders) and their assets (domestic currency loans to domestic borrowers). We study the effect of this mismatch on monetary policy in a sticky-price, dynamic general-equilibrium small open economy model in which the country default-risk premium depends on domestic banks' balance sheets due to asymmetric information. A fixed exchange rate rule that stabilizes bank balance sheets offers greater stability than does an interest rate rule that targets inflation to offset the real effects of sticky-prices.     

Local currency systemic risk

Emerging country governments increasingly issue local currency denominated bonds and foreign investors have been increasing their holdings of these assets. By issuing debt denominated in local currency, emerging country governments eliminate exchange rate risk. The growing stock of local currency government debt in the financial portfolios of foreign investors increases their diversification and exposure to fast growing economies. In this paper, we highlight some of the risks associated to this recent trend. First, we adopt the CoV aR risk-measure to estimate the vulnerability of individual countries to systemic risk in the market for local currency government debt. Second, we show that our country-level estimates of vulnerability increase with the share of local currency debt held by foreign investors. A version of the old adage “When New York sneezes, London catches a cold,” used often to describe the relationship between the stock markets in these two cities, still applies between individual emerging countries and the aggregate market for local currency government debt.     

Debt composition and balance sheet effects of exchange rate depreciations: a firm-level analysis for Chile

By studying the behavior of foreign currency borrowing, maturity, sales and the investment decisions of firms listed in the Chilean Stock Exchange from 1994 to 2001, this paper assesses whether in the aftermath of the Asian crisis of the late 1990s the depreciation of the local currency (Chilean peso) affected these firms’ real and financial decisions. At issue is the contrast between a negative net-worth effect and a potential expansionary competitiveness effect for the tradable sector. We find that there exists little evidence that devaluations cause a positive impact on investment and sales for firms with dollar denominated debt. The maturity structure of Chilean firms is mainly explained by the size of the companies. Large firms will have a debt structure biased to higher maturities. Analyzing dollar denominated debt composition the evidence shows that larger firms maintained a higher proportion of dollar denominated debt reflecting the development of the financial sector in Chile.     

Do high interest rates defend currencies during speculative attacks? New evidence

Kraay [Kraay, A., 2003. Do high interest rates defend currencies during speculative attacks? Journal of International Economics 59, 297-321.] documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper revisits Kraay's work and modifies it by introducing an improved measure of monetary policy and an additional country-specific fundamental, short-term corporate debt, to capture balance sheet vulnerabilities emphasized by the recent currency crises literature. The results show that for low levels of short-term corporate debt, raising interest rates lowers the probability of a successful attack. This effect decreases and eventually reverses for higher levels of debt. These findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises.     

Uncovered interest parity: it works, but not for long

If an investor borrows in a low interest currency and invests in a high interest currency, the interest differential accrues in a lumpy manner, formally just like the dividend payments on a stock. The investor will receive the interest differential discretely at the point when a position is rolled over from one day to the next. A position that is not held open overnight receives no interest differential because intradaily interest rates are zero. Using a large data set of intradaily exchange rate data, we run uncovered interest parity (UIP) regressions over different short time intervals taking careful account of the settlement rules in the spot foreign exchange market. We find results that are supportive of the uncovered interest parity hypothesis over very short windows of data that span the time of the discrete interest payment. However, adding even a few hours to the span of the window destroys the positive uncovered interest parity results.     

Balance sheet effects of foreign currency debt and real exchange rate on corporate investment: evidence from Turkey

I analyze the balance sheet channels of depreciation of the Turkish non-financial corporations for 2003–2015. Having constructed a novel, hand-collected firm-level dataset on the composition and term structure of foreign currency assets and liabilities, I show that foreign currency debt and mismatch has a significant negative balance sheet effect on capital investment following a depreciation. The results remain same even after controlling for foreign currency assets and exports. This implies that the contractionary net worth effect of depreciation dominates its expansionary competitiveness effect. The result is more pronounced for the firms with short-term foreign currency exposures.     

金融危机理论演进与发展研究

随着我国金融开放的深度和广度的不断提高,旧有风险进一步暴露,新的风险进一步产生。我国经济受全球经济波动的影响越来越大,发生金融危机的可能性也在增大。由于金融危机的最大特征就是货币的急剧贬值,关于货币危机的研究也最为成熟,目前已形成四代理论模型。而银行业危机理论和外债危机理论的研究比较分散,还没有形成像货币危机理论那样完善的体系。     

The Question of Sustainability for Microfinance Institutions*

Microentrepreneurs have considerable difficulty accessing capital from mainstream financial institutions. One key reason is that the costs of information about the characteristics and risk levels of borrowers are high. Relationship‐based financing has been promoted as a potential solution to information asymmetry problems in the distribution of credit to small businesses. In this paper, we seek to better understand the implications for providers of “microfinance” in pursuing such a strategy. We discuss relationship‐based financing as practiced by microfinance institutions (MFIs) in the United States, analyze their lending process, and present a model for determining the break‐even price of a microcredit product. Comparing the model’s results with actual prices offered by existing institutions reveals that credit is generally being offered at a range of subsidized rates to microentrepreneurs. This means that MFIs have to raise additional resources from grants or other funds each year to sustain their operations as few are able to survive on the income generated from their lending and related operations. Such subsidization of credit has implications for the long‐term sustainability of institutions serving this market and can help explain why mainstream financial institutions have not directly funded microenterprises. We conclude with a discussion of the role of nonprofit organizations in small business credit markets, the impact of pricing on their potential sustainability and self‐sufficiency, and the implications for strategies to better structure the credit market for microbusinesses.     

Microcredit: an answer to the gender problem in funding?

Microfinance institutions (MFIs) target people excluded from the traditional banking system. By providing start-up capital to these under-financed individuals, they enable a greater number of women to start their own business, particularly in sectors where initial capital requirements are high. Our study follows a portfolio of 3,640 microcredit applicants in France over the 2000–2006 time period, identifying MFI client profiles and bringing to light gender differences in borrowers compared to a wider sample of entrepreneurs. This study shows that the male–female gap found amongst company creators is also maintained amongst the clienteles of MFIs. Empirical results also suggest that gender is a decisive factor regarding the amount of credit provided to borrowers when comparing with other factors in the borrower and firm profile. Thus to a certain extent, MFIs are found to reinforce gender inequalities in France.     

Valuation and Hedging of Differential Swaps

This paper derives a general‐form formula for pricing and hedging differential swaps with the principal denominated either in a domestic, foreign, or third‐country currency. We first derive the formula for differential swaps with the principal in a domestic currency and identify an error in the formula of Wei (1994). We then show the pricing duality between differential swaps with the principal in a domestic currency and differential swaps with the principal in a foreign currency. Finally, we complete the pricing and hedging analysis on differential swaps by deriving a formula for differential swaps with the principal denominated in a third‐country currency. Simulation results indicate that constant margin rates are generally smaller than interest rate differentials and decline with the tenor of swaps. Correlation parameters associated with the exchange rate play a more important role than correlation parameters among interest rates in pricing differential swaps. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:73–94, 2002     

Funding development infrastructure without leverage: A risk‐sharing alternative using innovative sukuk structures

Muslim countries of the developing world suffer indebtedness resulting mostly from funding development infrastructure. Faced with a dire need for development infrastructure but with inadequate resources to fund them domestically, these governments often resort to foreign borrowing. As neither foreign banks nor international debt markets would allow for the debt to be in home currency, the funding is invariably denominated in foreign currency. For the borrowing country, in addition to currency exposure such borrowing increases the country's leverage and economic vulnerability. As these countries typically have a narrow economic base with heavy reliance on commodity exports, they are susceptible to the vagaries of commodity price fluctuation. Leverage increases the amplitude of the economy's fluctuation, resulting if not in outright crisis, then, at least in financial distress and depreciating home currency. As a result, when the foreign currency funded project comes on stream, it is burdened with huge accumulated debt which in many cases makes the project unmanageable without further government help through subsidy of operating costs. This further stresses already stretched government budgets and perpetuates indebtedness. This cycle of borrowing, leverage and vulnerability can be broken by innovative use of sukuk. The problem with debt financing is that the servicing requirements are independent of the underlying project's risk or cash flows. This paper presents two sukuk structures based on the risk sharing principles of Islamic finance. Sukuk that have returns linked to the nation's gross domestic product growth if the funded project is non‐revenue generating and linked to earnings of the project if it is revenue generating can avoid the problems above. The pay‐off profile, estimated cost of funds and returns to investors of these sukuk are discussed. When designed in small denomination, such sukuk can enhance financial inclusion, help build domestic capital markets and enable the financing of development without stressing government budgets.     

The effects of the saving and banking glut on the U.S. economy

We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.     

Currency depreciations, financial transfers, and firm heterogeneity

The present paper investigates five episodes of currency collapse from the perspective of non-financial firms operating in Argentina, Brazil and Mexico. We focus on two aspects: wealth and income transfers from borrowing firms to lenders and firm heterogeneity. At the firm level, we find that the currency collapses are preceded and associated with sharply rising financial transfers from firms to lenders. The debt and income structure is central in explaining the asymmetric firm dynamics. Most affected are firms with high levels of unhedged foreign-currency debt. At the country level, Argentina, Brazil, and Mexico display three contrasting examples. Argentina has a large currency mismatch, Brazil balances the currency denomination of debt and income (natural hedge), and Mexico occupies an intermediate position.     

On international integration of emerging sovereign bond markets

The paper investigates the international integration of EM sovereign dollar-denominated and local-currency bond markets. Factor analysis is used to examine movements in bond yields and common sources of variation. Results suggest that EM dollar-denominated debt markets are highly integrated; one common factor, highly correlated with US and EU interest rates, explains 80% of the total variability in yields. Local currency bond markets are not as internationally integrated, and three common factors explain 74% of total variability. But a global interest rates factor still explains 63% of the yield variation accounted for by common factors. Heterogeneity among EMs is explored.     

Monetary Union Viability: A Criterion Proposal

We propose a model that represents the dynamic behaviour of a monetary union comprising two countries whose natural interest rates are initially unequal. This initial disparity and the subsequent application of a common monetary policy generate different national inflation rates and lead to losses of competitiveness, foreign deficits, and the indebtedness of one country with respect to the other. We propose as a viability criterion for the modelled monetary union a combination of non‐explosive foreign debt and the ability of the central bank to neutralize the contracting effects of taking on additional debt to avoid falling into a liquidity trap.     

Fairness and microcredit interest rates: from Rawlsian principles of justice to the distribution of the bargaining range

This paper addresses the fairness of microcredit interest rates. Since microfinance institutions provide credit for the poor at relatively high prices, the fairness of their interest rates has been repeatedly debated. We first apply Rawls' principles of justice to the case of microcredit interest rates and suggest some limitations related to the hypothesis of rationality of the borrowers and the level of inequality. We then suggest another framework based on the analysis of the distribution of the benefits generated by the transaction to assess the fairness of interest rates. We conceptualize this as the distribution of the bargaining range between the borrowers' and the institutions' reservation price and discuss what these reservation prices could be in the context of microfinance.     

新冠肺炎疫情后各国主权债务风险及其前景

新冠肺炎疫情及其经济冲击促使许多国家财政赤字率和政府债务率大幅升高,其影响程度超过了2008年国际金融危机。笔者既不赞成现代货币理论(MMT)的看法,也不认同悲观派的看法。从影响各国主权债务风险的几大因素看,一些新兴市场经济体尤其需要关注利率的3种风险溢价:通胀风险溢价、货币贬值风险溢价和信誉(违约风险)溢价。展望未来,发达经济体和新兴市场经济体将花费数年时间进行财政收支和政府债务调整,以渐进方式推进政府部门的去杠杆。