In addition, dollarization would not completely eliminate risk premia, because debt repayment problems are certainly possible in fully dollarized economies. So, an important issue is how much of the prevailing risk premia faced by small open emerging market economies is due to exchange rate risk and how much to other considerations.
Finally, lower risk premiums could have the perverse effect of alleviating pressure on governments to pursue structural reforms that would lead to a more lasting improvement in the economy’s performance.