In the early 2000s, many developing countries in Eastern Europe, Latin America and Asia presented substantial corporate dollar debts. This paper suggests an explanation for this worrisome phenomenon, which builds on the traditional signalling approach. If lenders have no direct possibility to infer a firm’s financial status, solid firms might want to borrow dollars and bear a high clearance cost just in order to signal their type. When dollar borrowing clearance costs are relatively small with respect to the clearance cost of borrowing in the local currency, fragile firm would adopt the same strategy and the whole corporate sector would opt for liability dollarization. The signalling effect vanishes.
BESANCENOT, D. et VRANCEANU, R. (2006). Dollar Debt in Developing Countries: Too Much of a Good Thing? Global Economy Journal, pp. 1-18.