A question from a novice

Suppose a certain country is loaded with a very heavy debt burden. Does devaluating that country's currency make paying off its debt easier?

Reply to
JCE
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I afraid its one of those Yes and Nos, but usually No unless debt in local currency. Loads of factors need to be taken into account - inflation, balance of imports and exports ....

The No Answer:

International debt is usually provided in a stable currency i.e. US dollars. If the original exchange rate was US$1 to 2 Third World Country Pounds (TWP) devaluing say moves it from US$1 to 4. So the country has to generate twice as much internal wealth (assuming there is no inflation) to buy dollars to pay back the loan. Think of it as houses - you have to sell double the number to foreigners to raise the dollar debt repayment.

More complicated answer is that goods become more competitive globally generating higher exports, more exports means more earnings with which to pay back debt, making it easier but country still has to work twice as hard to generate goods.

The Yes Answer:

Debt provided in local currency TWP. Devaluation as above. Debt stays same but can sell goods on international market for twice as many TWPs to pay back loan quicker. The houses are now worth the same original US$ to foreign purchases but double the TWP

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Reply to
a0000000000

I do not understand what your question is. You originally asked what effect a devaluation had on the ease of repayment. I am not sure what difference the currency being tied to a tangible asset has. The way the devaluation would occur in this case would be to move the exchange rate in relation to the tangible asset. i.e. if gold was 100 TWP to the ounce it would be changed to 200 TWP to the ounce.

Pegged rates are fixed by the countries central bank buying and selling its own currency in the international markets at the peg rate.

Reply to
a0000000000

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