The Seven Mechanisms for Achieving Sovereign Debt Sustainability

Abstract

This paper surveys the sovereign debt literature and summarizes the political economy trade-offs of seven distinct mechanisms for achieving debt sustainability. Two mechanisms – financial aid and asset exchange – are often underemphasized or entirely overlooked even though they can play an important role in sustaining public debt. These two mechanisms may receive less attention due to prior emphasis on sovereign debt reduction, or how to pay-down nominal public debts, over sustainability, defined as maintaining any given level of debt without triggering a crisis. Mechanism examples and their policy trade-offs are discussed. In the absence of sufficient economic growth (the near universally preferred solution to a debt problem) or financial aid (which typically requires international cooperation) financial repression may prove relatively attractive to policymakers.

Keywords: sovereign debt, debt sustainability, economic growth, fiscal consolidation, inflation, asset sales, asset exchange, financial aid, financial repression, debt forgiveness, default, repudiation

JEL Classification: H63, E58, E61, E62, F53, F55, H12, H27, P16