Sovereign Risk, Currency Risk, and Corporate Balance Sheets

We examine the question of why a government would default on debt denominated in its own currency. Using newly constructed dataset 14 emerging markets, we document that private sector continues to borrow from abroad foreign currency while sovereigns increasingly foreigners local Because depreciation can be very costly for corporate with mismatch due liabilities, market may still prefer sovereign rather than inflate away. our cross-country dataset, show higher reliance external financing is associated risk debt. quantify effects balance sheet credit by introducing and into standard model. The model demonstrates how composition borrowing affects sovereign's incentive or times fiscal stress. Reductions share lead significant reductions risk. A calibration generates empirical patterns documented Du Schreger (2014).