Financial Repression and Debt Liquidation in the US and the Euro Area
Intereconomics: Review of European Economic Policy, Springer, vol. 47(6), pages 344-351.
20 Pages Posted: 12 Sep 2012 Last revised: 17 May 2013
Date Written: October 16, 2012
In this paper, we argue that rising debt levels have caused a revival of financial repression in the Euro Area and the US to reduce debt-servicing costs and even liquidate debt. We describe how, in addition to the “safe haven capital flight,” the Federal Reserve directly represses US bond yields and assists in financing the state budget. We estimate an overall liquidation effect from a fall in bond yields of about 1 percent of the GDP in 2011. In other words, the US government was able to avoid interest payments of about 3 percent of its total government revenues due to the reduction in debt-servicing costs. In the Euro Area, the continuous actions performed to contain the European debt crisis have repressed interest rates. Consequently, debt service has become easier in all European countries. The falling debt-servicing costs have reduced the interest rate payments for the German government by about 1–2 percent of total government revenues. We show that a slight rise in inflation could even liquidate German debt.
Keywords: Debt liquidation, financial repression
JEL Classification: E58, E63, F34
Suggested Citation: Suggested Citation