Foreign Currency Borrowing By Small Firms

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Executive Summary

The authors examine the firm- and country-level determinants of the currency denomination of small business loans. They first model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs, and also examines the impact of information asymmetry between banks and firms. When foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firms' revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk.

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