Economics Exchange Rate Systems Questions
The impact of exchange rate changes on sovereign debt can be significant. When a country's currency depreciates, meaning it loses value relative to other currencies, the value of its outstanding debt denominated in foreign currencies increases. This is because the country will need to use more of its own currency to repay the debt, which becomes more expensive. As a result, the country's debt burden increases, making it more difficult to service and potentially leading to a higher risk of default. On the other hand, if a country's currency appreciates, the value of its foreign currency-denominated debt decreases, making it easier to repay. Overall, exchange rate changes can have a direct impact on the affordability and sustainability of a country's sovereign debt.