The Primary Causes of International Financial Crises: Foreign Currency Denominated Debt and Original Sin

Borrowing in foreign currency has been an important source of financing especially for developing countries. However, despite its critical function in meeting the requirements of the economy, foreign currency borrowing was also among the main factors triggering and/or deepening the financial crises hindering the development progress of these countries. Original sin in economy literature is defined as the inability of countries to borrow in domestic currency from abroad. In this thesis, some of theories on determinants of international original sin phenomenon are investigated. Predicted values of foreign currency denominated indebtedness and it's marginal effects are obtained based on country characteristics by employing a panel data double censored tobit model estimation technique between 1990-2012 for 41 countries. The results suggest that absolute size of the economy is a significant determinant of the international original sin. Financial and economic development is also found to be necessary in order to redeem from the original sin problem. What is the role of foreign currency debt in precipitating international financial crises? In this thesis we examine the effects of foreign currency debt on debt crises, currency crises, banking crises and the interrelation between these varieties of crises by employing panel data probit model between 1990-2010 for 39 countries. 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. Good financial management of the original sin condition, strong financial development and agile responsiveness to crises seem to play a role in helping avoid crises.