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Debt burdens in Europe and South America and the secrets of MMT

Above: “Currency Composition of Argentina’s Public Debt (as a % GDP),” which appears as Figure 2 from post by Cibils and Arana in Triple Crisis blog (see discussion below).

In writing my post yesterday, I noticed Paul Krugman recently commented on recovery in Europe, which has indeed occurred to a large extent in most of the continent. The problems there starting in about 2010 had to do with debt countries owed in Euro following a deep recession at best, especially in the “peripheral” countries of Greece, Portugal, Ireland, and Spain. Bad debt has recently also been a threat to stability of some major European financial institutions.

Countries lacked the ability to devalue or to decide on their own to inflate to make government debt easier to repay. The overly tight fiscal and monetary policies that prevailed at first during the crisis undercut the ability to keep GDP and hence tax revenues growing. Hence, unemployment rates have been abysmal in much of Europe for a long time.

Krugman states that the recovery to positive growth has been achieved by central bank bond purchases in hours of desperation and by “internal devaluations” (wage reductions) that are painful to most workers. It remains to be seen if the whole thing will keep running–and Greece remains in very bad shape. A heavier dose of outright debt foregiveness may sadly yet prove to have been necessary to get the economy sustainably moving.

Of related interest is a recent post by Alan Cibils and Mariano Arana in the Triple Crisis blog (like Krugman’s, with great charts) documenting that the neoliberal government in Argentina, which allowed its currency to float, has taken on large amounts of government debt in foreign currency. Argentina had very high interest rates and appeared poised to reduce them as part of the changeover to the new policy regime.

As noted yesterday, the key Modern Monetary Theory (MMT)* conditions to avoid traps in which debt becomes unpayable are a sovereign currency, a flexible exchange rate, and payment commitments only in the sovereign currency. Probably a completely floating currency is better insurance that one has eliminated financial constraints characteristic of an occasionally bankrupt household. The choice of foreign currency–denominated debt would appear to be unwise on the part of policymakers, as pointed out by Cibils and Arana. The authors do not mention MMT, but their post will be of interest to MMTers.

Also in the southern cone of South America, Brazil has been an interesting example (also shifting to the right politically) of a country whose currency was floated long ago, that also experienced financial crises, and that has markedly moved to finance with government debt in its own currency–a thankful situation documented in an academic paper by Renato de Souza Rosa and André Martins Biancarelli called “Currency of Denomination and External Vulnerability in Developing Countries: A New Picture from Brazil” (direct link to paper pdf at IMK [Macroeconomic Policy Institute] think tank site).

The Triple Crisis piece is from January 3–a while back–but Krugman’s report on Europe gives me an excuse to mention it.

I believe the ability to not go bankrupt with large amounts of debt is a simple matter of the aforementioned conditions holding. (Alternative conditions exist involving effective capital controls.)

The sometimes-unstated reason for foreign-currency debt in less-developed countries is a lower interest rate–along with various unhelpful doctrines, theories, and the like.

*MMT is a recurring theme here. My posts on this set of policy-related doctrines from economics are in a category of their own, which can be reached using the links in the menu on the left side of the blog homepage.


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