Politics determines how developing countries borrow

According to a new study co-authored by Princeton University researchers, understanding how a country solves a debt crisis is necessary to solve the debt crisis, and for many developing countries, these Choices are rooted in political ideology.Credits: Egan Jimenez, Princeton University

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

Still, among the 76 countries subject to freezing, Debt Repayment Suspension Initiative-Structure debt Debt fluctuates dramatically, raising concerns about long-term debt sustainability.

Resolving the debt crisis requires understanding how countries borrow, and for many developing countries these choices are Political ideologyAccording to a new study co-authored by researchers at Princeton University.

Papers published in the journal International organizationIs one of the first to show a new trend. Developing countries tend to borrow in their domestic currency when issuing government bonds. This is a common way for governments to borrow to pay off their debts. This may make it easier to act on the basis of domestic policy preferences.

Political ideology plays a role.If developing countries have left-wing governments, they tend to rent in their own country 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 creditors put on the government and the ease or difficulty of repayment of these debts. For example, countries that borrow primarily in foreign currencies can be hit hard when the currency depreciates, as they need to generate foreign exchange to pay off their debts. Countries that choose short-term borrowing need to refinance their debt more often and are at risk of entering unfavorable markets.

“Our findings are contrary to expectations that developing countries are often unable to borrow in their own currencies. Some of these countries are exposed to exchange rate 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 foreign currency. ” International affairs At Princeton School of Public International Affairs.

The “expectation” mentioned by Mosley is a concept that economists call “original sin” to explain sovereign borrowing by developing countries. For example, a country like Zambia, whose external debt has increased by 1,000% over the last nine years, may be able to borrow from the private capital markets, but it still needs to address creditor concerns about investment risk. One way to alleviate investor anxiety is to borrow in foreign currency. In this way, investors don’t have to worry about inflation or currency depreciation. The logic of “original sin”, thanks to its position, Developing countries, Zambia and its peers in developing countries have little choice but to rent. Foreign currency.. This logic has long suggested that international creditors do not want to buy government bonds in their domestic currency.

Still, Mosley and her collaborators have found another way. Borrowing domestic currencies has become much more common.To reach this conclusion, Mosley and her collaborators investigated government Bond issuance in 131 countries from 1990 to 2016. This new dataset contained 240,000 new government bonds.

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

“To understand the challenges of sovereign debt and sovereign debt restructuring, we must consider the domestic political incentives of the debtor government,” Mosley said. “And at the international level, we need to focus on the role of credible commitment, 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. Come to Condition: Sovereign Debt Sectarian Politics, International organization (2021). DOI: 10.1017 / S0020818321000357

Quote: Debt Crisis: The politics that determine how developing countries borrow (August 5, 2021) is https: // Obtained from August 5, 2021

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Politics determines how developing countries borrow

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