The foreign-currency share of the debt of low-income countries is around 70-85%. This makes them vulnerable to adverse events like a war, pandemic or financial crisis, as these will often lead to a flight to (dollar) quality and rapidly depreciating local currencies.
This results in their debt servicing costs shooting up, credit ratings being slashed, interest rates skyrocketing and refinancing risks jumping. This in turn leads to further capital flight, further depreciations, and, ultimately, a sovereign default: the debt doom loop.
In a Financial Times article that was published today, TCX’s CEO Ruurd Brouwer goes into this unfortunate chain of events, highlighting several examples and calling on official lenders to finally break this loop, by lending in local currency.
Please read the article here, as published by the Financial Times. You can also read a PDF version here.