I am using Mishkin's textbook "Economics of Money, Banking and Financial Markets." On the chapter on financial crises, the authors list a number of factors that could trigger a crises.
One factor is An Unanticipated Decline in the Value of the Domestic Currency. I quote "Because of uncertainty about the future value of the domestic currency in developing countries (and in some industrialized countries), many nonfinancial firms, banks, and governments in developing countries find it easier to issue debt denominated in foreign currencies rather than their own currency. This can lead to a financial crisis in a similar fasahion to an unanticipated decline in the price level. With debt contracts denominated in foreign currency when there is an unanticipated decline in the value of the domestic currency, the debt burden of domestic firms increases.• Since assets are typically denominated in domestic currency, there is a resulting deterioration in firms' balance sheets and a decline in net worth, which then increases adverse selection and moral hazard problems along the lines just described."
I don't get the logic. The authors are a bit vague: a decline in the value of the domestic currency perhaps means a depreciation relative to other currencies. Now, if that is correct, if there is uncertainty about the future value of the domestic currency, why would firms issue debt denominated in foreign currencies? If domestic currency is expected to appreciate, then only does it make sense (forgetting uncovered interest parity for now). Am I thinking correctly about this?
Thanks!