The Liquidation of Government Debt

Carmen Reinhart and M. Belen Sbrancia

No 2015/007, IMF Working Papers from International Monetary Fund

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.

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 (search for similar items in EconPapers)
Pages: 47
Date: 2015-01-21
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Citations: View citations in EconPapers (124)

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Related works:
Journal Article: The liquidation of government debt (2015)
Working Paper: The Liquidation of Government Debt (2011)
Working Paper: The Liquidation of Government Debt (2011)
Working Paper: The Liquidation of Government Debt (2011)
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