Posted by WARREN MOSLER on May 10th, 2013
Seems like subversive propoganda to me.
They deliberately ignore the obvious fixed vs floating fx distinction, for example.
A few comments below:
May 10 (Fitch) — Fitch Ratings says in a newly-published report that the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth. They can and do.
Local currency defaults in the recent era include: Venezuela (1998), Russia (1998), Ukraine (1998), Ecuador (1999), Argentina (2001) and Jamaica (2010 and 2013). Nonetheless, we recognise that local currency defaults are less frequent than foreign currency defaults and are unlikely for countries with debt mainly denominated in local currency at long maturity.
Russia and Argentina, for example, had headline, well publicized fixed exchange rate policies, where they fixed the value of their currency to the $US. Failing to recognize that in this report is intellectually dishonest.
To assess the capacity which sovereigns have to inflate away their debt, this report uses our debt dynamics model to illustrate how much surprise inflation might be required for three hypothetical scenarios. For a country with a large primary budget deficit, gains to the debt to GDP ratio from even quite high inflation would be short-lived. While for a country with a debt to GDP ratio of 100%, primary deficit of 1%, real growth equal to the real interest rate and a 10-year average debt maturity, it would take a jump to 30% inflation (from our 2% baseline) for three years and 10% thereafter to bring the debt ratio below the 60% Maastricht threshold.
There is no such thing as ‘inflate away their debt’ as govt debt represents the global net savings of financial assets of that currency. So all that can be said in this context is that ‘savings desires’ are, for all practical purposes, always going to be there as some % of GDP.
Undoubtedly, higher inflation can be used to raise seigniorage (the difference between the value of money and the cost to print it)
This is nonsensical with floating exchange rate policy ( non convertible currency) as, for example, all US govt spending can be called ‘printing’ as it’s just a matter of the Fed crediting a member bank account. Likewise, taxing is ‘unprinting’ as it’s just a matter of debiting a member bank account. With fixed fx policy, it’s the ratio of convertible currency outstanding vs the actual fx reserves at the CB, a very different matter.
and remittance of central bank profits to the government, up to a point. Nevertheless, in the long run, the ratio of government debt/GDP will rise if the government is running a primary budget deficit (excluding interest payments and including seigniorage), assuming the real growth rate does not exceed the real interest rate, irrespective of the inflation rate.
An unanticipated burst of inflation can reduce the real value of government debt as long as the debt is not of short maturity (as higher inflation is quickly reflected in the marginal cost of funding), index linked or denominated in foreign currency (as the exchange rate would depreciate). Thus countries with such characteristics – which give them ‘monetary sovereignty’ – do have some capacity to inflate away their debt.
Linking govt payments to an index is a form of fixed exchange rate policy and yes, govts can and do default on these types of fixed exchange rate ‘promises.’
Inflation is economically and politically costly.
Politically costly, yes, but economically, there are no studies that show real costs to the economy from inflation.
Thus, even if a sovereign has a capacity to inflate away its debt, it might choose not to. It is also far from clear how much money would need to be printed to deliver the ‘right’ inflation rate, as the current debate over quantitative easing highlights. Instead a sovereign might view a Distressed Debt Exchange (DDE) as a less bad policy option. Fitch classifies a DDE as a default.
This is a confused rhetoric and a display of total ignorance of actual monetary operations.
The myth that sovereigns that can print money cannot default on debt in their own currency has also fed the proposition that such local currency ratings are irrelevant.
Fitch is again refusing to distinguish convertible and non convertible currency policy.
Fitch disagrees that default is inconceivable or impossible. The agency agrees that countries with strong monetary sovereignty and financing flexibility are unlikely to default and these are important factors in Fitch’s sovereign rating methodology that affect both local and foreign currency ratings.
A sovereign’s local currency rating is closely linked to its foreign currency rating. It is typically one or two notches higher, owing to the sovereign’s somewhat greater capacity to pay debt in local currency, as taxes are usually paid in local currency and it may have better access to a stable domestic capital market, as well as some capacity to print money. It may also be more willing to service local currency debt if more of it is held by local banks and other residents.