Understanding local currency

[BHeng9611]

Hi all,

Refer to the attached, seek your kind assistance on 3 issues that I faced.

1) What does it mean by foreign currency debt funding local currency assets? Correct me if I am wrong. Does it mean earning money through exploiting the high interest rate of local currency by borrowing foreign currency and then convert to local currency and then deposit it to earn the high interest rate?

2) I dont get the first highlighted sentence. If I make money through foreign currency debt funding local currency, I will not have any issue in clearing local currency debt. Why will I or a country choose to default local currency debt if I am making money?

3) I dont get the 2nd highlighted sentence located in the last sentence of the paragraph. Can any kind soul explain to me with an example?

Thank you,
BX

 

[gsarm1987]

Hi all,

Refer to the attached, seek your kind assistance on 3 issues that I faced.

1) What does it mean by foreign currency debt funding local currency assets? Correct me if I am wrong. Does it mean earning money through exploiting the high interest rate of local currency by borrowing foreign currency and then convert to local currency and then deposit it to earn the high interest rate?

2) I dont get the first highlighted sentence. If I make money through foreign currency debt funding local currency, I will not have any issue in clearing local currency debt. Why will I or a country choose to default local currency debt if I am making money?

3) I dont get the 2nd highlighted sentence located in the last sentence of the paragraph. Can any kind soul explain to me with an example?

Thank you,
BX

its more like being embarrassed (default) at home is better than being embarrassed (default) in the public (globally). in local terms you notes can be printed, but foreign notes cant. institutions like banks or pension funds follow Liability driven investing, so they have liabilities and they want to have assets thet defease or offset those liabilities. imagine if the asset was in a high interest rate economy, that implies asset is loosing value faster than the liabilities so a mismatch