A published exchange-rate path became a risky promise
Chile’s preannounced depreciation schedule was meant to make the peso’s decline predictable. Instead of leaving the exchange rate to move unpredictably, the government signaled how quickly the peso would lose value against the dollar. That gave businesses and investors a timetable they could use when setting prices, contracts, and investments.
The schedule also shaped a tempting financial trade. A borrower could take out a loan in dollars, exchange those dollars for pesos, and invest the pesos at a higher interest rate. If the peso weakened only as much as the schedule implied, the investment might earn enough to cover the dollar loan and leave a profit. The gap between the two interest rates was not free money: the strategy depended on the exchange rate following the announced path.
When the peg broke, the debt stayed in dollars
In 1982, Chile’s exchange-rate arrangement snapped. The peso fell more sharply than the schedule had led traders to expect. The peso investments were then worth less when converted back into dollars, while dollar debts did not shrink with them. Borrowers who had counted on a gradual, manageable depreciation suddenly faced a much larger bill in local currency.
That mismatch helps explain why a seemingly technical exchange-rate policy could have consequences beyond currency markets. A predictable path can encourage people to plan around it—and to take on debt that is safe only while the promise holds. Once the peso broke away from the schedule, the same predictability that had supported the bet made the reversal especially painful.
