Unit 3 · Level 2 · Government debt & fiscal policy
Debt spirals
Debt is sustainable while the economy grows faster than the interest bill. Flip that (interest compounding faster than growth) and the debt feeds on itself: more borrowing just to pay interest on old borrowing. It's the dark twin of the compounding you met in the Investing course, and for several emerging markets it isn't theory. It's memory.
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What you get asked
A debt spiral becomes likely when:
There's no magic debt number: Japan sails past 200% of GDP while other countries have collapsed below 60%. The killer is the RATE maths. When interest outpaces growth, the pile compounds against you.
Argentina has defaulted on its sovereign debt roughly how many times in its history?
Around nine defaults, most recently in 2020. Each one made the next crisis likelier: burned lenders demand higher yields, and higher yields are exactly what feed the spiral.
In Greece's 2012 restructuring, private bondholders took a haircut of over ___ of face value.
Roughly 53% written off, the largest sovereign restructuring in history. 'Risk-free government bonds' is a phrase Greek bondholders stopped using that year.
Order the anatomy of a debt spiral
Notice the loop: yields rise BECAUSE debt looks risky, and the debt gets riskier BECAUSE yields rose. Spirals are self-fulfilling, which is what makes them so hard to escape.
Honestly, what usually ends a debt spiral in an emerging market?
There's no painless exit. Someone eats the loss: bondholders via haircuts, citizens via austerity or inflation. When you hear a country's debt is 'unsustainable', the only question left is who pays. 🐜
The rest of this unit
Deficits, bond markets, and the day investors say no.