Unit 4 · Level 2 · Global flows
The dollar-debt trap
Emerging markets often can't borrow abroad in their own currency (lenders don't trust it), so they borrow in dollars. Economists grimly call this 'original sin'. It works beautifully until the local currency slides: then the dollar debt, measured in local money, balloons overnight. Argentina and Turkey have both lived this movie. More than once.
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What you get asked
Order the classic emerging-market dollar-debt crisis
The same pattern powered the Latin American crises of the 1980s, Asia in 1997, and Argentina and Turkey since. Different decades, different flags, identical mechanics.
Why exactly is borrowing in dollars a 'trap' for emerging markets?
Taxes arrive in pesos or lira; the debt is owed in dollars. When the local currency halves, the debt effectively doubles, a mismatch no budget survives gracefully. The dollar loans were cheap; that was the bait.
Between 2018 and 2023, Turkey's lira lost over ___ of its value against the dollar.
With inflation officially topping 85% in 2022 while rates were held low, the lira collapsed, and every dollar owed by Turkish firms became several times heavier in lira terms.
Argentina's inflation rate in 2023 ran above:
Prices roughly tripled in a year. Argentines long ago learned to save in dollars they keep outside the banking system, which itself deepens the trap by starving the peso of trust.
What core pattern do Argentina's and Turkey's crises share?
High inflation, sliding currency, dollar debts growing heavier by the day: the trap in one sentence. When you read 'EM crisis', check the currency chart first; the story is usually written there. 🐜
The rest of this unit
Trade balances, petrodollars, and the money that flees at midnight.