‘Dollar’ debt in Colombian firms: are sinners punished during devaluations?

Echeverry, Juan Carlos; Fergusson, Leopoldo; Steiner, Roberto; Aguilar, Camila

doi:10.1016/s1566-0141(03)00063-3

“…5 Studies using micro-level data have analyzed the effect of foreign currency debt on firm investment and employment with mixed evidence on the balance sheet channel, as mentioned before. Similar to Aguiar (2005), Carranza et al (2003), Echeverry et al (2003), Benavente et al (2003), and Galiani et al (2003) find that firms with higher foreign debt contract investment more after devaluations. Based on data from Hungary, Varela and Salomao (2016) find that foreign currency borrowing is associated with higher aggregate income, but at the expense of higher volatility.…”

supporting

confidence: 62%

Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

Schmidt‐Eisenlohr

¹

2017

SSRN Journal

3

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Evidence from U.S. Banks Abstract When firms borrow in foreign currency but collect revenues in local currency, exchange rate changes can affect their ability to repay their debt. Using loan-level data from U.S. banks' regulatory filings, this paper studies the effect of exchange rate changes on firms' loan payments. A 10 percent depreciation of the local currency makes a firm with foreign currency debt 69 basis points more likely to become past due on its loans than a firm with local currency debt. This result implies that firms do not perfectly hedge against exchange rate risk and that this risk translates into credit risk for banks. The findings lend support to both the balance sheet channel and the financial channel of exchange rates. Terms of use: Documents inJEL-Codes: F310, G150, G210.

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“…Changes in the exchange rate strongly affect real prices, at least in the short to medium run+ Because depreciation lowers the international price of exports, it promotes export growth by increasing their international competitiveness+ 12 Consequently, export-oriented industries are usually believed to favor a more depreciated exchange rate+ 13 When the depreciation contributes to a realignment of the 11+ Frieden 1991+ 12+ See Forbes 2002Echeverry et al+ 2003;and Pratap, Lobato, and Somuano 2003, for some empirical studies on this topic+ 13+ Frieden 1991 and2002;Frieden, Ghezzi, and Stein 2001;Leblang 2003;and Blomberg, Frieden, and Stein 2005+ currency, it can also stimulate the economy as a whole+ However, depreciation also increases the price of imports and puts upward pressure on the inflation rate+ Such price increases hurt consumers and firms that strongly rely on internationally tradable inputs and imported goods+ If exchange-rate stability and the resulting stability of the investment environment is one of the main comparative advantages of a country's financial sector, depreciations can also damage financial firms' competitiveness+ Of course, these positive and negative effects can partially offset each other+…”

Section: Competitiveness and Purchasing Power Concernsmentioning

confidence: 99%

A New Approach for Determining Exchange-Rate Level Preferences

Walter

¹

2008

Int Org

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In research on the political economy of exchange rates, a good understanding of who will endorse and who will oppose certain exchange-rate policies is central to understanding how actual exchange-rate policies are made and how the global exchange-rate system changes over time+ Since existing classifications of exchange-rate level preferences have several shortcomings, this article proposes a new and more nuanced strategy for identifying preferences on exchange-rate valuation+ This approach takes into account the complex interrelationship between exchange-rate and monetary policy, and the effects of these policies on balance sheets+ In addition, the approach accounts for the dynamics of preference formation and change+ Comparative case studies of currency crises in Hong Kong, South Korea, Thailand, and Taiwan show that considering actors' vulnerabilities to exchange-rate and interest-rate changes enhances understanding of their exchange-rate level preferences+ The case studies also indicate that societal preferences affect policy outcomes+ Exchange-rate stability was maintained in countries where private actors' vulnerabilities to depreciation were high+ However, when pressure intensified, exchange rates were subsequently depreciated in countries where vulnerabilities to a monetary tightening exceeded the potential costs of depreciation+ How economic policies affect preferences is an important question, both in theoretical and policy terms+ For example, some actors benefit from a fixed exchange rate, whereas others are hurt by such an exchange-rate regime+ Some actors benefit from an appreciating exchange rate, while for others a depreciating currency is more advantageous+ In combination with domestic and international institutions, such societal pressures are widely understood to affect actual policy outcomes as well as the global exchange-rate system+ 1 Gaining a good understanding of who will endorse and who will oppose certain exchange-rate policies is therefore cen-I would like to thank

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“…1 In fact, a recent study by Echeverry et al(2003) suggests that exchange rate depreciations during the 1990s decreased the profitability of firms holding dollar-denominated debt. 2 Uruguay is a similar case.…”

Section: Very High Dollarization: the Cases Of Bolivia And Perumentioning

confidence: 99%

“…Balance sheet effects of exchange rate fluctuations appear to be highly significant in countries with different degrees of dollarization. Echeverry et al (2003) find that, despite low dollarization in Colombia, firms that borrow in dollars are not fully hedged and suffer from economic fluctuations. Bonomo, Martins and Pinto (2003) and Carranza, Cayo and Galdón-Sánchez (2003) find similar results for Brazil-another country with relatively low dollarization-and highly dollarized Peru, respectively.…”

mentioning

confidence: 92%

Living with Dollarization and the Route to Dedollarization

Galindo

¹

,

Leiderman

²

2005

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, InterAmerican Development Bank. Terms of use: Documents inThe Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications and read or download them, please visit our web site at: http://www.iadb.org/res 2 Abstract * Financial dollarization in Latin America has been growing over time in spite of a major reduction in inflation and a shift toward central bank independence. After discussing the key stylized facts of dollarization and dedollarization in the region, we discuss the risks this process poses to the region. In particular, we explore the validity of concerns about the effectiveness of monetary policy in a dollarized economy and about a loss of seigniorage revenue in such an economy. After concluding that to a large extent these concerns lack empirical support, we focus on the main reason for concern: increased vulnerability due to the dollarization of public and private debt.We emphasize the importance of precautionary/regulatory measures to limit the scope of mismatches originating from liability dollarization, and of developing financial instruments designed to hedge against currency risk. Moreover, we deal with the experience of policies directly aimed at deepening domestic financial markets in local currency assets and in gradually lengthening the maturity of these assets. We find that important lessons from the experience of dedollarization in Israel are of particular interest for Latin America.

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‘Dollar’ debt in Colombian firms: are sinners punished during devaluations?

Cited by 57 publications

References 17 publications

Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

A New Approach for Determining Exchange-Rate Level Preferences

Living with Dollarization and the Route to Dedollarization

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