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Answer: Printing money to pay its local currency debt can be useful for a country in the short term, but can result in serious economic consequences in the long term.
**D is correct.** In the case of being in danger of a default on local currency bonds, printing money is likely to be attractive in the short term because a country's reputation and credit rating will not immediately suffer. However, printing money debases the currency and leads to inflation in the longer term. **A is incorrect.** The local currency rating of a country is typically one or two notches higher than the foreign currency rating. **B is incorrect.** Most of the recent instances of foreign currency sovereign default involved the exchange of old bonds for new bonds with some net present value loss to lenders. **C is incorrect.** Debt issued in a foreign currency is often purchased by global banks and other international lenders.
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A fixed-income trader recently joined a large bank that acts as a dealer in the sovereign bonds of several countries. The trader researches the differences between a country's foreign currency sovereign bonds and its local currency sovereign bonds, including the differences in their default risk and investor demand. Which of the following would the trader find to be correct?
A
A country's foreign currency debt rating is typically higher than its local currency debt rating.
B
Investors in foreign currency sovereign bonds typically lose the entire value of their investment upon a country's default, whereas investors in local currency bonds do not.
C
Debt issued in foreign currency is usually sold to investors based in the issuing country.
D
Printing money to pay its local currency debt can be useful for a country in the short term, but can result in serious economic consequences in the long term.