## Deciding When Debt Becomes Unsafe ## Source details **Canonical URL:** [Deciding When Debt Becomes Unsafe](https://www.imf.org/en/publications/fandd/issues/2022/03/deciding-when-debt-becomes-unsafe-blanchard) ## Other formats - [Markdown version](/en/publications/fandd/issues/2022/03/deciding-when-debt-becomes-unsafe-blanchard/index.md) - [Structured JSON version](/en/publications/fandd/issues/2022/03/deciding-when-debt-becomes-unsafe-blanchard/index.json) - [Bundle manifest](/en/publications/fandd/issues/2022/03/deciding-when-debt-becomes-unsafe-blanchard/bundle-manifest.json) ## Bibliographic details - Authors: Olivier Blanchard - Published: March 1, 2022 --- ### Definition of "unsafe" debt - Debt becomes unsafe when "there is a non-negligible risk that, under existing and likely future policies, the ratio of debt to GDP will steadily increase, leading to default at some point." - Determining safety requires projections and an assessment of the probability distribution of future outcomes, not a single point forecast. ### Key determinants of debt dynamics - The dynamics of the debt-to-GDP ratio depend on three variables: - primary budget balances (spending net of interest payments minus revenues); - the real interest rate (the nominal rate minus the rate of inflation); - the real rate of economic growth. ### Two-step analytical approach - Step 1: Form forecasts for the three determinants under existing policies and derive the implications for debt-to-GDP dynamics over the next decade or so. - Produce distributions (ranges) for each variable to capture uncertainty. - Assess risks such as: - probability and magnitude of a recession; - risk that real interest rates will rise and how debt maturity affects interest payments; - distribution of the exchange rate if debt is partly in foreign currency; - probability that implicit liabilities (for example, social security) become actual liabilities; - distribution of the underlying potential growth rate. - Step 2: Evaluate the likelihood that the government will change policy if adverse trajectories emerge. - Considerations include: - nature of the government (coalition vs. large majority); - outcomes of future elections; - country reputation and history of default. - If, after Step 1, the probability that the debt ratio steadily increases at the end of the horizon is small enough, debt can be considered safe; otherwise Step 2 is required. ### Uncertainty and the limits of simple rules - There is no universal magic number for a safe debt level; context matters (country, time, policy, currency denomination, government type). - Changes in real interest rates can materially alter safety assessments: - Example: "Suppose ... the real interest rate falls by 4 percentage points. That implies a decrease in the real cost of servicing the debt of 4 percent of the debt ratio; so if debt is 100 percent of GDP, debt service falls by 4 percent of GDP." - Small changes in real rates can dramatically change debt-service costs: "An increase in the real rate from 1 percent to 2 percent will double the debt-service cost." - The ratio of debt service to GDP can be a more relevant metric than debt-to-GDP, but it also faces substantial variability because real interest rates are uncertain. ### Implications for policy and rules - Simple fiscal rules (single debt or deficit thresholds) are inadequate because they cannot capture the many contingencies that affect debt sustainability. - Strict rules (for example, Maastricht criteria or Black Zero balanced-budget norms), if enforced rigidly, will ensure sustainability but can constrain fiscal policy when relaxation is warranted. - Historical example cited: fiscal consolidation in the European Union after the global financial crisis, triggered by rules, was "too strong and delayed the EU recovery." - Complex rule-sets also fail in practice: adding conditions makes rules incomprehensible while still insufficient to address the underlying complexity. ### Practical recommendation - For meaningful assessments, apply the two-step approach to specific countries at specific times, using transparent assumptions and distributions, and then debate the reasonableness of those assumptions. - Avoid seeking or applying one-size-fits-all simple or complex numeric rules; instead, use tailored probabilistic analysis that accounts for fiscal policy, interest-rate risk, growth uncertainty, debt structure, and political factors. *Source: Olivier Blanchard, "Deciding When Debt Becomes Unsafe," F&D Magazine, March 2022.* --- ## Content in this bundle - **وجهات نظر في الدين - متى يتقرر أن الدين أصبح غير آمن** - [وجهات نظر في الدين - متى يتقرر أن الدين أصبح غير آمن (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ar/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [وجهات نظر في الدين - متى يتقرر أن الدين أصبح غير آمن (PDF)](/-/media/files/publications/fandd/article/2022/march/ar/blanchard.pdf){rel="external" type="application/pdf"} - **Deciding When Debt Becomes Unsafe** - [Deciding When Debt Becomes Unsafe (Markdown version)](/-/media/files/publications/fandd/article/2022/march/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [Deciding When Debt Becomes Unsafe (PDF)](/-/media/files/publications/fandd/article/2022/march/blanchard.pdf){rel="external" type="application/pdf"} - **Quand la dette devient-elle dangereuse ?** - [Quand la dette devient-elle dangereuse ? (Markdown version)](/-/media/files/publications/fandd/article/2022/march/fr/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [Quand la dette devient-elle dangereuse ? (PDF)](/-/media/files/publications/fandd/article/2022/march/fr/blanchard.pdf){rel="external" type="application/pdf"} - **債務の見方** - [債務の見方 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ja/blanchard-jp.pdf.md){rel="alternate" type="text/markdown"} - [債務の見方 (PDF)](/-/media/files/publications/fandd/article/2022/march/ja/blanchard-jp.pdf){rel="external" type="application/pdf"} - **Как узнать, когда долг становится небезопасным** - [Как узнать, когда долг становится небезопасным (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ru/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [Как узнать, когда долг становится небезопасным (PDF)](/-/media/files/publications/fandd/article/2022/march/ru/blanchard.pdf){rel="external" type="application/pdf"} - **Cómo decidir cuándo la deuda se torna peligrosa ● Finanzas y Desarrollo ● Marzo de 2022** - [Cómo decidir cuándo la deuda se torna peligrosa ● Finanzas y Desarrollo ● Marzo de 2022 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/sp/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [Cómo decidir cuándo la deuda se torna peligrosa ● Finanzas y Desarrollo ● Marzo de 2022 (PDF)](/-/media/files/publications/fandd/article/2022/march/sp/blanchard.pdf){rel="external" type="application/pdf"} - **债务洞察** - [债务洞察 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/zh/blanchard.pdf.md){rel="alternate" type="text/markdown"} - [债务洞察 (PDF)](/-/media/files/publications/fandd/article/2022/march/zh/blanchard.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2022/03/deciding-when-debt-becomes-unsafe-blanchard_