Can the Public Carry Trade Restore Fiscal Sustainability? Evidence from Korea's Consolidated Balance Sheet

Can governments use a carry-trade strategy to offset the fiscal costs of population aging? We examine this question through the consolidated balance sheet of Korea’s public sector, combining the assets and liabilities of the government, public pension and investment funds, and the central bank. The consolidated balance sheet reveals increasing reliance on a carry trade in which risky, increasingly foreign assets are financed with safe, low-yielding domestic liabilities. This strategy has generated a favorable return spread and strengthened public net worth. However, present-value accounting shows that projected government and pension deficits substantially exceed the public sector’s accumulated financial wealth. A VAR-based simulation similarly indicates that persistent structural deficits eventually overwhelm the returns from public assets and drive consolidated net worth deeply negative. Financial repression can delay this deterioration but cannot restore fiscal sustainability; moreover, it shifts the cost disproportionately to less financially sophisticated depositors. Neither the carry trade nor financial repression can substitute for fiscal and pension reform.