The structural vulnerability of emerging economies to exchange rate shocks is modeled by macroeconomists through the concept of Original Sin—the inability of a country to borrow abroad in its own domestic currency.

Because international investors demand debt instruments denominated in dominant currencies like the US Dollar or Euro, 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 local economic shocks or capital flights drive a depreciation of the domestic currency, the value of the firm’s assets remains unchanged in local terms, but the real burden of its foreign-denominated liabilities spikes. This shift can trigger widespread corporate bankruptcies and banking crises, forcing central banks to maintain large foreign currency reserves to intervene and defend the currency during market downturns.