UNIT 9: DEBT AND DEVELOPING COUNTRIES
Essential terms:
• “Original sin”: refers to the fact that developing economies can not borrow in
their domestic currencies.
1. The problem of original sin
• When developing economies borrow in international financial capital markets,
the debt is almost always denominated in US$, yen, euros “original sin”
• A devaluation of the domestic currency causes an increase in net foreign wealth.
• When a depreciation/devaluation of domestic currencies occurs in developing
economies, the value of their liabilities (debt) rises because their liabilities are
denominated in foreign currencies.
2. Types of financial capital
DEBT FINANCE
1. Bond finance: government or comercial bonds are sold to private foreign
citizens.
2. Bank finance: commercial banks lend to foreign governments or foreign
businesses
3. Official lending: the World Bank or -inter-American Development Bank or
other official agencies lend to governments.
EQUITY FINANCE
