Mert Önen

It is hard to measure financial repression intensity in emerging markets (EMs). I propose the Domestic Bond Premium (DBP), the yield spread between local currency (LC) government and AAA-rated supranational bonds in the same currency and tenor. Across 11 EMs, I show that the DBP is frequently negative and stable during financial stress, when LC government spreads over US Treasuries widen sharply. A portfolio choice model decomposes the DBP into default, liquidity, and repression components, and the empirical evidence points to repression compressing government borrowing costs relative to supranationals. The implied fiscal footprint, however, is modest. Financial repression saves governments under one percent of tax revenue on average. Larger savings require inflation surges or severe bond market distortions, leaving repression as an unlikely remedy for high public debt.

This article examines sovereign bond markets to assess the current state of Original Sin, the inability of a country to borrow (abroad) in its own currency. We present a synthesis of different strands of the literature using a new, tailored dataset. We find that major emerging market economies (EMEs) have made progress towards overcoming original sin by issuing more government bonds in local currency while promoting foreign participation in domestic bond markets; this went hand in hand with rising exposure to EME currencies among foreign investors. In panel regressions, we show that country-specific variables played a role alongside global push factors. However, progress has been slow and uneven, with a key role for institutional development. Progress is most evident among major EMEs, and stronger for sovereigns than for other issuers. Reducing reliance on foreign currency borrowing implies a greater role for investors whose sensitivity to currency risk can make capital flows more volatile—reintroducing the problem in a different guise, as original sin redux.