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The Liquidation of Government Debt

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  • M. Belen Sbrancia
  • Ms. Carmen Reinhart

Abstract

High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.

Suggested Citation

  • M. Belen Sbrancia & Ms. Carmen Reinhart, 2015. "The Liquidation of Government Debt," IMF Working Papers 2015/007, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2015/007
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    More about this item

    Keywords

    WP; debt; nominal interest rate; government debt; inflation rate; margin requirement; deleveraging; inflation; financial repression; public debt; liquidation year; free market; World War II; coupon rate; GDP ratio; debt liquidation; Depression debt; Real interest rates; Negative interest rates; Debt reduction; Africa; Global; Europe;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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