DP15170 Currency-Induced External Balance Sheet Effects at the Onset of the COVID-19 Crisis

Author(s): Galina B Hale, Luciana Juvenal
Publication Date: August 2020
Date Revised: October 2020
Keyword(s): Balance sheet effects, Coronavirus, COVID-19, currency mismatch, Flight to safety
JEL(s): F32, F34, G15
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15170

At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of "safe haven" currencies. We quantify the aggregate external balance sheet effects of this episode using new data on the currency composition of cross-border portfolio debt and other investment (which mostly represents banking positions) for 48 countries. We find that, while currency mismatch was present on many countries' external balance sheets at the onset of the current crisis, the magnitude of this mismatch was modest and the resulting external balance sheet losses at the aggregate level are small. To account for the potential mismatch that may have resulted from domestic investments by financial intermediaries borrowing abroad, we compute an upper bound for possible losses and find that they might be quite sizable for a number of countries. These results highlight the importance of accounting for domestic assets when assessing currency-induced balance sheet effects.