PSC Nov 3 Review States have 3 main monetary policy choices Regime x oat and value strong weak International capital controls yes or no macroeconomic policy interest rate autonomy yes or no Sovereign Debt i e banks bondholders foreign governments international nancial institutions External sovereign debt money owed by a government to a foreign entity Promise to pay principal interest and fees Debt is not equivalent to De cit External Sovereign Lending Loans to foreign governments Why do countries get into foreign debt Limited domestic capital Allows governments nance investment to promote growth development Freedom to temporarily allow spending How do countries get into foreign debt Government bond auction Bonds are an I O U maturities vary 3 months vs 10 years Borrowing isn t free Price charged determined by markets demand Why do creditors lend abroad Chasing returns or safety investing for pro ts return on capital is greatest in capital scarce countries some sovereign debt views as very low risk Balance these bene ts against risks lending takes place in anarchy no international court to enforce loan contracts sovereign borrower may want to renegotiate terms Inability vs Unwillingness Countries don t go bust Wriston With enough austerity almost all countries could pay back their debs austerity measures signi cant spending cute and revenue increases on the part of a gov in order to pay back creditors Governments weigh social and political issues alone with economic considerations Bargaining Debtor bargaining tool threaten to default Lender bargaining tool threaten to cut off future lending shadow of the future threaten to cut foreign aid threaten military action gunboat diplomacy Default in practice most defaults are only partial typically after long negotiations Default in practice most defaults are only partial typically after long negotiations debtor forces its creditors to accept longer repayment schedule such episodes are typically referred to as an international debt crisis How are debt crises typically resolved International Monetary Fund IMF lend money to defector IMF quota size based on state size voting power based on quota