Serial Default and Its Remedies

The main theme of this paper is that debt cycles deeply entrenched in the process of development, and one must be careful about trusting magic elixirs that purport to finesse the problem entirely. Middle income countries nascent political and economic institutions, often simultaneously face extremely high degrees of economic uncertainty, not least stemming from the extraordinary volatility of world commodity and agricultural prices. At the same time, many of these countries have exhausted autarkic growth strategies, and find themselves desparately needing to deepen financial markets in order to efficiently allocate scarce saving and expand growth. But this process of deepening – often associated with increased international capital market integration – almost invariably exposes them to heightened risks. And, unfortunately, once a country suffers one bout of default, its institutions and markets become weaker and more vulnerable to more debt problems, a phenomenon Reinhart, Rogoff and Savastano term “Debt Intolerance.”