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Old Sins Exchange Clauses and European Foreign Lending In the Nineteenth Century

Old Sins Exchange Clauses and European Foreign Lending In the Nineteenth Century

Chapter:
(p.154) 6 Old Sins Exchange Clauses and European Foreign Lending In the Nineteenth Century
Source:
Other People's Money
Author(s):
Marc Flandreau, Nathan Sussman
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226194578.003.0007

One popular explanation for original sin emphasizes expectations. Some countries do not have a sufficient record to borrow in their own currency. The market would then ration them, or would dictate terms that would deter them from borrowing in their own currency. From a policy point of view, the response to these problems would be to establish credibility by creating institutions: an independent central bank, the rule of law, and protection of property rights would be what is needed to establish a record that would in turn enable borrowing in one's own currency. This chapter challenges this popular, “expectations driven” interpretation of original sin. The 1890s crises in Argentina, Brazil, and Portugal all began with an exchange crisis that triggered a default or near default through the governments' liability exposure to exchange depreciation. Like today, a number of emerging nations had borrowed in gold or set a fixed exchange rate for the coupon, which led to defaults.

Keywords:   original sin, Argentina, Brazil, exchange crisis, depreciation, currency, expectations, institutions, defaults, exchange rate

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