Wojtek Paczos, Kirill Shakhnov, 24 September 2020

The sharp reductions in economic output and large-scale government expenditures prompted by the Covid-19 pandemic have led to an enhanced risk of sovereign defaults, especially in emerging economies. This column argues that an output drop alone increases the risk of foreign default, while a sudden expenditure hike alone increases the risk of domestic default. Thus, given the double nature of the Covid shock, recent proposals that would ease the burden of foreign debt after COVID-19 in emerging economies are necessary but may not be sufficient to prevent a wave of defaults on domestic debt.

Viral Acharya, Raghuram Rajan, Jack Shim, 16 June 2020

While many theories of international borrowing emphasize its advantages, it has proven difficult to empirically establish a correlation between a developing country’s use of foreign financing and good outcomes such as stronger growth. This column proposes a theoretical framework that reconciles the above puzzle. It establishes that a developing country’s propensity to save is essential in determining whether the government’s ability to borrow in international markets is welfare improving for its citizens or not. Hence, debt is not always 'odious' and alternative policies such as debt ceilings may prove more useful, especially in the midst of the current pandemic.

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