"Over the past five years, foreign currency borrowing by firms in emerging markets has risen by about 50 per cent, " said Ms Lagarde.

CNN: Lagarde warns over three-speed world

Not only does a fixed rate prevent a central bank from using interest rates to prevent an economy from overheating (because higher interest rates would push up the value of the currency), but it also encourages too much foreign-currency borrowing when foreign interest rates are lower than local ones.

ECONOMIST: Keeping the hot money out

Foreign-currency borrowing, 95% of it in Swiss francs, accounts for over two-thirds of total lending.

ECONOMIST: Eastern Europe��s economies: Some calm amid storms | The

The flood of foreign-currency borrowing destabilised their economies and left them vulnerable when Western banks reduced lending.

ECONOMIST: BRICs, emerging markets and the world economy

In effect, countries will be borrowing in a foreign currency without control of the printing presses.

ECONOMIST: Financial markets and the euro

Borrowing in a foreign currency is a problem if debt costs rise because the currency used to pay that debt is weakening.

FORBES: For Brazil's Currency, it's the Summer of 2008 Again

The study was done from a U.S. dollar view, but the council said its findings are applicable to other foreign investments where higher borrowing costs make traditional currency hedging expensive.

FORBES: INTERVIEW: WGC: Gold Overlay Works As Currency Hedge In EM Currencies

They were a way to keep down inflation, but they also encouraged excessive borrowing in foreign currencies, creating strains that eventually broke the currency peg.

ECONOMIST: Emerging markets