Debt Intolerance

Carmen M. Reinhart,

Carmen M. Reinhart Minos A. Zombanakis Professor of the International Financial System - Harvard Kennedy School

Kenneth Rogoff, and

Kenneth Rogoff Professor of Economics - Harvard University

Miguel A. Savastano

MAS

Miguel A. Savastano International Monetary Fund

Discussants: Christopher A. Sims and

CAS

Christopher A. Sims

John Williamson

JW

John Williamson

In this paper we argue that history matters: that a country’s record at
meeting its debt obligations and managing its macroeconomy in the past
is relevant to forecasting its ability to sustain moderate to high levels of
indebtedness, both domestic and internal, for many years into the future.
We introduce the concept of “debt intolerance” (drawing an analogy to,
for example, “lactose intolerance”), which manifests itself in the extreme
duress many emerging market economies experience at overall debt levels
that would seem quite manageable by the standards of the advanced
industrial economies. For external debt, “safe” thresholds for highly debtintolerant
emerging markets appear to be surprisingly low, perhaps as low
as 15 to 20 percent of GNP in many cases, and these thresholds depend
heavily on the country’s record of default and inflation. Debt intolerance
is indeed intimately linked to the pervasive phenomenon of serial default
that has plagued so many countries over the past two centuries. Debtintolerant
countries tend to have weak fiscal structures and weak financial
systems. Default often exacerbates these problems, making these same
countries more prone to future default. Understanding and measuring debt
intolerance is fundamental to assessing the problems of debt sustainability,
debt restructuring, and capital market integration, and to assessing the
scope for international lending to ameliorate crises.