Moreover it is hard to imagine indebted households that are eager to realize their losses on their foreign exchange liabilities while switching to the more expensive domestic currency financing, which is also subject to interest rate risks. It seems that the only safe way forward is a slow process of private sector balance sheet adjustment.
Policy can support this process by doing everything in its power to reduce the country specific risk premium and enhance financial stability. This includes ensuring sustainability of public finances, anchoring inflation expectations, preventing the recurrence of irresponsible foreign exchange lending through prudential regulation, and last but not least creating a growth friendly environment through structural reforms.