The “original sin” of quick and easy borrowing could ravage developing markets

Adam and Eve being cast out of Eden after failing to keep up with their payments on dollar-denominated bonds.
Adam and Eve being cast out of Eden after failing to keep up with their payments on dollar-denominated bonds.
Image: Michelangelo/Wikimedia Commons
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Investors are hungry for higher yields, and Hungary is ready to help. Next week, soon after wrapping up investor meetings, the country may launch its first dollar-denominated bond offering in over a year and a half, which could be worth $2-$3 billion. It will be a test of whether the country can rely on its own investment appeal, rather than help from the International Monetary Fund (IMF), to build back its capital markets and refinance its foreign currency obligations. But is Hungary digging a hole for itself?

Given that monetary easing in rich countries is keeping yields on their bonds firmly depressed, Hungary shouldn’t have much trouble selling its new debt. Investors sniffing for returns have been plowing cash into emerging markets, which issued $350 billion in new debt in 2012. But there are growing fears among economists, including those at the IMF, that smaller, poorer, or less stable countries raising debt on international markets—as Hungary is doing next week, and as Angola, Namibia, and Mongolia all did last year—could be exposing themselves to what economists call “original sin.”

The risk is that if these countries run back into economic turbulence—which such countries are prone to do—their currencies could plunge. Any debt they hold in dollars will become much harder to pay back. (It’s called “original sin” because international debt offerings combine the temptation of instant elevation with the risk of a sudden fall from grace.) A feature of the international debt crises of the 1980s and 1990s, “original sin” eventually made it impossible for some countries to use their local currencies to borrow abroad, or even domestically.

So while Zambia has less debt and more growth, proportionally, than most countries in Europe right now, its recent $750 million bond offering should be viewed with caution. As Ken Rogoff, a noted scholar of debt and financial crises, recently told the Financial Times: “When the rich world isn’t growing and has zero interest rates, it naturally leads to tremendous pressure on emerging markets. If they handle the inflows well it will lead to growth, but some will not handle it well.”