A couple of thoughts on @HyunSongShin latest BIS bulletin (a great series by the way).

1/ Think now clear that a high level of foreign holders of EM local currency debt can be a source of risk, and can amplify pressure on the FX market in particular

https://www.bis.org/publ/bisbull05.pdf

2/ So local currency borrowing isn't a panacea, even if it can help avoid fx mismatches by putting them on the shoulders of investors. Turns out investors often want to shed that risk in periods of stress (and put pressure on reserves if countries worry about the XR)

3/ There a parallel here to the Asian insurers dollar hedging need (mentioned in the first BIS bulletin) that I want to flesh out.

4/ Japanese and Taiwanese institutional investors with local currency obligations are to the U.S. corporate market what dollar based institutional investors are to the EM local currency market. In both cases, the investors really want a return in their "home" currency.

5/ The Asian insurers typically hedge, and play a credit/ term premium spread game (tho when hedging gets more expensive/ typically when the US curve is flat they also tend to cheat on their hedges). In a crisis, their challenge is maintaining access to existing hedges ...

6/ And their "home" central banks typically can provide the hedge (turns out the Taiwanese central bank does this even in normal times), as their home country has large fx reserves.

7/ Dollar based investors looking for dollar returns in EM local markets by contrast typically don't hedge -- they are playing a "carry" game (EM local markets offer higher yields) in good times, but may want to hedge in bad times (or sell, which generates the same fx pressure)

8/ That amplifies fx moves, as the BIS points out -- and if the local investors are selling longer dated bonds, can put pressure on longer term rates too. And puts pressure on reserves if the country's central banks wants to supply the hedge (takes $) or limit depreciation

9/ Same underlying position, but slightly different dynamics in a crisis ...

At least that is how I see it. Reactions appreciated.

10/ Here again is a link to the paper that prompted all of this. Great work.

https://www.bis.org/publ/bisbull05.htm