Is Domestic Debt the Answer to Debt Crises?

This paper emphasizes that it matters whether domestic debt means debt issued in local currency (at home or abroad) or to local investors (in domestic or foreign currency) or governed by local law (also in domestic or foreign currency). From the perspective of organizing a debt workout, the governing law is the most important issue, while from an economic sustainability perspective the currency of the obligations is paramount. Indeed, this chapter asks if countries are in fact reducing their risks at reasonable costs. For low-income countries, external debts are long-term and carry concessional interest rates, and substituting domestic debt for foreign can be relatively expensive. Local debt generally has a shorter maturity than much of the external debt, and therefore has to be refinanced more frequently, so that countries increase rollover risk as they reduce foreign exchange risk.