Domestic Bonds

Policy determines how developing countries borrow


Understanding how a country resolves a debt crisis is necessary to resolve the debt crisis, and for many developing countries those choices are rooted in, according to a new study co-authored by researchers at Princeton University. political ideology Credits: Egan Jimenez, Princeton University

To mitigate the economic impact of COVID-19, interest payments on bilateral public debt have been frozen in some of the world’s poorest countries this year and in 2020.

Yet among the 76 countries subject to the freeze, the Debt Repayment Suspension Initiative – Debt Structure Debt fluctuates widely, raising concerns about long-term debt sustainability.

Solving the debt crisis requires understanding how countries borrow, and for many developing countries those choices are a matter of political ideology, according to a new study co-authored by researchers at Princeton University.

Articles published in the journal International organisationIs one of the first to show a new trend. Developing countries tend to borrow in their national currencies when issuing government bonds. It is a common way for governments to borrow to repay their debts. This can make it easier to act on the basis of domestic policy preferences.

Political ideology plays a role. If developing countries have leftist governments, they tend to rent in their own country’s currency. If you have a right-wing government, you are more likely to borrow in a foreign currency such as the US dollar. .

These choices determine the type of pressure that creditors exert on the government and the ease or difficulty of repaying these debts. For example, countries that borrow primarily in foreign currencies can be hit hard when the currency depreciates, as they need to generate currencies to repay their debts. Countries that choose short-term borrowing need to refinance their debt more often and risk entering unfavorable markets.

“Our findings run counter to expectations that developing countries are often unable to borrow in their own currencies. Some of these countries are exposed to currency risks and monetary policy constraints. They seem willing to pay the additional cost of borrowing in domestic currency to avoid this, which may be associated with borrowing in foreign currency. ”International Affairs At the Princeton School of Public International Affairs.

The “expectation” mentioned by Mosley is a concept that economists call “original sin” to explain the sovereign borrowing of developing countries. For example, a country like Zambia, whose external debt has increased by 1000% over the past nine years, may be able to borrow in private capital markets, but it has yet to address creditors’ concerns about the debt. investment risk. One way to ease investor anxiety is to borrow in foreign currencies. This way, investors don’t have to worry about inflation or the depreciation of the currency. The logic of “original sin”, by its position, developing countries, Zambia and its peers in developing countries have little choice but to praise. Foreign currency. This logic has long suggested that international creditors do not want to buy government bonds in their national currency.

Yet Mosley and his associates found another way. Borrowing national currencies has become much more common. To reach this conclusion, Mosley and colleagues investigated government bond issuance in 131 countries from 1990 to 2016. This new data set contained 240,000 new government bonds.

Research shows it’s not just about how much the government borrows, or from sources such as the private bond market, bilateral government creditors such as the United States and China, and the World Bank. The terms on which a country borrows play an important role in debt settlement. These conditions depend not only on the preferences and demands of investors, but also on national government incentives.

“To understand the challenges of sovereign debt and sovereign debt restructuring, we need to consider the national policy incentives of the debtor government,” Mosley said. “And at the international level, we need to focus on the role of credible engagement, transparency and cooperation. These are all central themes in the study of international affairs.

Researchers have found that climate change undermines a country’s ability to repay pandemic debt.

For more information:
Cameron Ballard-Rosa et al. Coming to Condition: Sovereign Debt Sectarian Politics, International organisation (2021). DOI: 10.1017 / S0020818321000357

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Princeton University

Quote: Debt Crisis: The Policy That Determines How Developing Countries Borrow (August 5, 2021) is Obtained on or after 5 August 2021

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