Borrowing abroad often looks cheaper because the interest rate is lower. The saving is real only if the exchange rate holds, and the borrower is the one carrying that condition.
The mismatch at the centre of it
A firm earning revenue in one currency and owing debt in another has a balance sheet mismatch. The debt is fixed in foreign terms while the means of repaying it is not.
If the home currency weakens, the repayment obligation rises in home currency terms without any change in the loan. The borrower owes more in the only currency it actually has.
Nothing about the business has changed, yet leverage has increased. This is why apparently sound firms can breach covenants after a currency move.
Why the interest saving is misleading
Interest rates differ between currencies largely because expected inflation differs. A lower rate abroad usually accompanies an expectation that the borrower's currency will weaken over time.
Markets price that expectation into forward exchange rates, so the apparent saving is offset by the expected currency movement. The cheaper loan is cheaper for a reason.
Borrowers capture the saving only if the currency behaves better than the market expected. That is a speculative position taken alongside the borrowing.
Why the risk arrives all at once
Exchange rate moves affect every foreign currency borrower in a country simultaneously. Individual credit assessments miss this because the risk is common rather than specific.
A currency depreciation therefore produces a wave of distress rather than isolated defaults. Lenders discover their portfolio was less diversified than it appeared.
The same episode usually tightens local funding conditions, so refinancing becomes harder exactly when it is most needed. The two effects compound.
Who is naturally hedged and who is not
An exporter earning foreign currency has a natural offset, since revenue and debt move together. Foreign borrowing suits that profile.
A domestic property developer or utility earning only local currency has no such offset. Their foreign borrowing is an unhedged position however the loan is described.
Formal hedging is available but costly and usually shorter in tenor than the debt itself. A ten-year loan hedged one year at a time is only partly protected.
What sovereigns face in the same situation
Governments borrowing in foreign currency cannot print what they owe. The obligation must be met from reserves or export earnings.
This is why the share of sovereign debt issued in domestic currency is watched closely as a measure of vulnerability. Developing local bond markets has been a long-running policy objective in many countries.
Regulatory limits on foreign currency lending exist in several jurisdictions, particularly to households. Such rules differ widely and are revised as conditions change.