Overcoming Original Sin

Abstract This paper draws on newly expanded BIS government bond statistics to document how emerging market sovereigns have reduced their reliance on foreign currency denominated bonds since the emerging market crises of the 1990s. With external funding still important for emerging market governments, they have increasingly been able to borrow from foreign investors in their domestic currency. In this respect, emerging market governments are overcoming “Original Sin”. The flipside of these developments is that foreign investors increasingly bear the currency risk associated with fluctuations in emerging market exchange rates, making foreign investors’ portfolio decisions more sensitive to prevailing global financial conditions. Emerging markets thus remain vulnerable to reversals of investor sentiment in bond markets, whether or not they have outstanding debt in foreign currency.