Emerging market volatility is often driven by a structural vulnerability known as Original Sin—the inability of a developing country to borrow from foreign investors in its own domestic currency.

Because international investors demand debt instruments denominated in dominant global currencies like the US Dollar, emerging market governments and corporations build significant Currency Mismatches on their balance sheets:

Sovereign Corporate Balance Sheet = Assets valued in Local Peso Tokens vs. Liabilities owed in US Dollar Debt

When capital flights or global trade shocks drive a depreciation of the local currency, the real value of the firm’s assets remains unchanged in domestic terms, but the real burden of its foreign-denominated liabilities spikes. This shift can trigger corporate bankruptcies and banking crises, requiring central banks to maintain foreign currency reserves to support the market during downturns.