NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997

Michael D. Bordo, Christopher M. Meissner

NBER Working Paper No. 11897
Issued in December 2005
NBER Program(s):   DAE   IFM   ME

What is the role of foreign currency debt in precipitating financial crises? In this paper we compare the 1880 to 1913 period to recent experience. We examine debt crises, currency crises, banking crises and the interrelation between these varieties of crises. We pay special attention to the role of hard currency debt, currency mismatches and debt intolerance. We find fairly robust evidence that high exposure to foreign currency debt does not necessarily lead to a high chance of having a debt crisis, currency crisis, or a banking crisis. A key finding is some countries do not suffer from great financial fragility despite high exposure to original sin. In the nineteenth century, the British offshoots and Scandinavia generally avoided severe financial meltdowns while today many advanced countries have high original sin but have had few financial crises. The common denominator in both periods is that currency mismatches matter. A strong reserve position or high exports relative to hard currency liabilities helps decrease the likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We discuss the robustness of these results and make some general comparisons based on this evidence from over 60 years of intense international capital market integration.

download in pdf format
   (1591 K)

email paper

This paper is available as PDF (1591 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11897

Published: Bordo, Michael D. & Meissner, Christopher M., 2006. "The role of foreign currency debt in financial crises: 1880-1913 versus 1972-1997," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3299-3329, December.

Users who downloaded this paper also downloaded these:
Bordo, Meissner, and Stuckler w15534 Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View
Bordo and Meissner w11173 Financial Crises, 1880-1913: The Role of Foreign Currency Debt
Reinhart w8738 Default, Currency Crises and Sovereign Credit Ratings
Bordo and Meissner Financial Crises, 1880–1913: The Role of Foreign Currency Debt
Bordo, Meissner, and Redish w9841 How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us