Hy warned that the ability of a central bank to act as a lender of last resort is limited to debts denominated in the country’s own currency.3 When countries finance their domestic projects with foreign denominated debt, therefore, they lose the stabilizing potential of their central bank’s lender of last resort power and confront a far more challenging and potentially unstable environment.
In the case of the Asian crisis, the financing of domestic projects with foreign denominated debt — either directly or through the banking system — created an important vulnerability, one that was dramatically aggravated by the sharp depreciation of the currencies in the crisis countries, and one that domestic central banks had limited power to arrest.