Original sin was first used in an economic sense in 1999 when economists Barry Eichengreen and Ricardo Hausmann described the developing world’s inability to borrow abroad in their local currency the “original sin” of emerging markets.
Prof Hausmann, who teaches economics at Harvard University, felt Christianity’s doctrine of ancestral sin was a fitting metaphor: “It seemed to be a huge, persistent problem that all emerging markets were born with and had remarkable problems getting rid of,” he told the Financial Times.
Original sin is a pernicious phenomenon. Borrowing in foreign currencies can both trigger and exacerbate financial and economic crises. When a country’s debts are denominated in foreign currencies, it often forces policy makers to keep exchange rates pegged or heavily managed.
If the rate buckles, the authorities have to burn through valuable reserves and raise interest rates to protect the value of the local currency – even in the midst of a recession if necessary. If the peg breaks and the local currency tumbles, the foreign currency-denominated debt burden becomes much greater and can result in defaults.
Mexico’s “tequila crisis” is an example of the dangers of original sin. Money had gushed into Mexico in the early 1990s but when Alan Greenspan, the Federal Reserve chairman, raised interest rates in 1994 the boom came to an abrupt end. By December the government tried to depreciate the peso but the currency crashed by more than 50 per cent and Mexico had to be bailed out by the International Monetary Fund.
Original sin in the news
In January 2013, an FT writer wrote that the “original sin” of emerging markets was slowly receding as many turned to swelling local bond markets instead.
In June 2013, FT writers wrote that the reduction in “classic” original sin would help emerging markets resist the impact of the end of US monetary stimulus.
But in January 2014, an FT writer discussed how emerging markets were looking vulnerable to the risk of a resurgent dollar. Emerging markets’ original sin may have ameliorated, he wrote, but it was far from eliminated.