Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

IMF Working Papers, December 24, 2013

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Canonical URL: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

Authors: Carmen Reinhart, Kenneth Rogoff
Date: December 24, 2013
Summary (verbatim): Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial Repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.

Historical record in many advanced economies shows:
- Debt restructuring or conversions played an integral role in resolving significant past debt overhangs.
- Financial Repression featured as part of resolution strategies.
- A tolerance for higher inflation, or combinations of the above, were commonly used.
The prevailing policy stance that advanced countries can avoid emerging-market tools (debt restructurings and conversions, higher inflation, capital controls, other forms of financial repression) is inconsistent with historical experience.

Policymakers should not categorically exclude tools historically used in advanced-economy debt resolution:
- Consideration of debt restructurings and conversions where appropriate.
- Recognition of financial Repression as a historical mechanism for debt reduction.
- Awareness that tolerating higher inflation has been part of past resolutions.
The assumption that debt sustainability can be achieved solely through austerity, forbearance and growth may be incomplete given historical precedents.

Subject: Debt burden, Domestic debt, External debt, Financial crises, Public debt
Keywords: central government debt, country debt, credit cycles, crisis, debt, Debt burden, debt overhang episode, debt overhang problem, debt payment, debt picture, debt restructuring., debt to the United States, deleveraging, Domestic debt, Europe, Financial crises, financial repression, foreign currency, Global, inflation crisis, overhang episode, Reinhart, sovereign debt crises, war debt, World War I debt, WP