Someone Else’s Currency

Debt in a Currency You Cannot Print

Everything you have learned assumed the state borrows in money its central bank issues. For most of the world that assumption is false.

12 min150 XP available4 challenges

Run the model

A country borrows part of its debt abroad. Then its currency falls.

Debt ratios are a fraction: debt over GDP. When part of the debt is denominated in dollars and the currency depreciates, the numerator rises in local terms while the denominator does not. Nobody issued a bond. No deficit was run. The ratio moves anyway, and it moves most in exactly the circumstances — a currency under pressure — where the government can least afford it.

Debt ratio afterwards

70.29%

The foreign slice revalues; GDP does not

Of which the currency alone: 10.29%

Public debt before the move60%

As a share of GDP

Share of that debt in foreign currency40%

Depreciation of the local currency30%

Show that the exchange rate alone can add more than 20 points of GDP to the debt ratio

Try 0% — not yet
Try 100% — not yet
Show that the exchange rate alone can add more than 20 points of GDP to the debt ratio — not yet

Answer to continue.