The vulnerability of emerging markets to exchange rate adjustments is driven by a structural issue known as Original Sin—the corporate and institutional inability of a developing country to borrow from foreign investors in its own domestic currency.

Because international debt markets demand bonds denominated in dominant currencies like the US Dollar or Euro, emerging market entities build significant structural risks across their balance sheets:

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

When external shocks or capital flights trigger 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 widespread bankruptcies, requiring central banks to maintain large foreign currency reserves to support the market during downturns.