## The Liquidation of Government Debt

_IMF Working Papers, January 21, 2015_

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## Bibliographic details
- Authors: Carmen Reinhart, M. Belen Sbrancia
- Published: January 21, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484369234.001

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### Summary and central thesis
- High public debt can be reduced not only through default and restructuring but also through financial repression, described as 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.
- The authors suggest that financial repression may again be part of the toolkit to cope with the recent surge in public debt in advanced economies.

### Historical evidence and mechanisms
- After WWII, capital controls and regulatory restrictions were used to create a captive domestic audience for government debt.
- Financial repression operates through negative or below-market real interest rates, effectively transferring wealth from savers and bondholders to governments.
- The effectiveness of financial repression increases when combined with inflation, which reduces the real value of outstanding nominal debt.

### Quantitative findings and key statistics
- 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.

### Policy implications and recommendations
- Financial repression (including policies that produce negative or below-market real interest rates and capital controls/regulatory measures) may be considered as part of the policy toolkit to manage and reduce elevated public debt in advanced economies.
- Policymakers should be aware that financial repression acts as an implicit tax on savers and bondholders and is most effective when combined with inflation.

*The Liquidation of Government Debt, By Carmen Reinhart, M. Belen Sbrancia, January 21, 2015.*

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