Deficit Owls | Why Do Some Countries Borrow In Dollars? @deficitowls5296 | Uploaded October 2016 | Updated October 2024, 2 minutes ago.
Professor L. Randall Wray answering a question about why foreign countries borrow in dollars or other foreign currencies, and how this can lead to a currency crisis. Countries do this usually either because there's something they need that's not for sale in their own currency, or because they believe they can get a lower interest rate by borrowing in a different currency.
On a floating exchange rate, a country can have any interest rate they want in their own currency, because the central bank can buy the bonds to lower the interest rate, or they can just not issue debt, and just spend the money into existence. So issuing debt in a foreign currency really makes no sense for a floating exchange rate currency, unless there's something that's not for sale in that currency.
But on a fixed exchange rate, the story's a little different. In order to fix the exchange rate, the government must buy and sell the foreign currency they're converting to, in order to move the market price. To do this, they must operate their economy in such a way that they don't run out of the foreign currency, or else they won't be able to keep the promise to convert at the fixed exchange rate. If the government were to deficit spend without selling bonds ("printing money") then more people would be able to convert to the foreign currency, and the government might start to run out. So it's usually necessary for governments who are pegging their exchange rate to sell bonds to offset deficits, to reduce the demand for conversion. In order to sell all the bonds, the government must offer an interest rate high enough to make sure the market buys all the bonds, so under a fixed-exchange rate, the market controls the interest rate.
So, if a country wants a lower interest rate but doesn't want to abandon the exchange rate peg, then they MAY be able to get a lower interest rate by borrowing in a different currency. But then the market is likely to impose an additional risk premium to compensate for the government's potential inability to pay back the debt. So it may not end up working out anyway.
Proponents of Modern Money Theory generally say that borrowing in the foreign currency is not a good idea if you can avoid it. The best situation is with a floating exchange rate currency, in which allows the government the most domestic policy flexibility, because they can basically spend whatever they want until it runs out of things available to buy at the current prices. If the government *must* fix its exchange rate, in order to help its importers or its exporters, then borrowing in a foreign currency is still worse than borrowing in the home currency. If you borrow in the home currency, the worst that could happen is that people eventually become unwilling to accept bonds and not convert at any interest rate, so you have to abandon the peg. But you'll still be able to repay your debts. If you borrow in a foreign currency, you could run into a situation where you can't repay no matter what.
Watch the whole video here: youtube.com/watch?v=0zEbo8PIPSc
Thanks to the Modern Money Network for hosting this event. Check out their channel at: youtube.com/user/ModMonPubPurpose
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
Professor L. Randall Wray answering a question about why foreign countries borrow in dollars or other foreign currencies, and how this can lead to a currency crisis. Countries do this usually either because there's something they need that's not for sale in their own currency, or because they believe they can get a lower interest rate by borrowing in a different currency.
On a floating exchange rate, a country can have any interest rate they want in their own currency, because the central bank can buy the bonds to lower the interest rate, or they can just not issue debt, and just spend the money into existence. So issuing debt in a foreign currency really makes no sense for a floating exchange rate currency, unless there's something that's not for sale in that currency.
But on a fixed exchange rate, the story's a little different. In order to fix the exchange rate, the government must buy and sell the foreign currency they're converting to, in order to move the market price. To do this, they must operate their economy in such a way that they don't run out of the foreign currency, or else they won't be able to keep the promise to convert at the fixed exchange rate. If the government were to deficit spend without selling bonds ("printing money") then more people would be able to convert to the foreign currency, and the government might start to run out. So it's usually necessary for governments who are pegging their exchange rate to sell bonds to offset deficits, to reduce the demand for conversion. In order to sell all the bonds, the government must offer an interest rate high enough to make sure the market buys all the bonds, so under a fixed-exchange rate, the market controls the interest rate.
So, if a country wants a lower interest rate but doesn't want to abandon the exchange rate peg, then they MAY be able to get a lower interest rate by borrowing in a different currency. But then the market is likely to impose an additional risk premium to compensate for the government's potential inability to pay back the debt. So it may not end up working out anyway.
Proponents of Modern Money Theory generally say that borrowing in the foreign currency is not a good idea if you can avoid it. The best situation is with a floating exchange rate currency, in which allows the government the most domestic policy flexibility, because they can basically spend whatever they want until it runs out of things available to buy at the current prices. If the government *must* fix its exchange rate, in order to help its importers or its exporters, then borrowing in a foreign currency is still worse than borrowing in the home currency. If you borrow in the home currency, the worst that could happen is that people eventually become unwilling to accept bonds and not convert at any interest rate, so you have to abandon the peg. But you'll still be able to repay your debts. If you borrow in a foreign currency, you could run into a situation where you can't repay no matter what.
Watch the whole video here: youtube.com/watch?v=0zEbo8PIPSc
Thanks to the Modern Money Network for hosting this event. Check out their channel at: youtube.com/user/ModMonPubPurpose
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
