Bonkers Idea of the Day, EM Debt Edition

One of the things I love about academic economists is that they have a certain amount of freedom to be utterly bonkers occasionally. The LSE's Bernardo Guimaraes has a modest proposal up at Vox: rewrite the bonds of developing countries so that they become variable-rate instruments which pay less when interest rates go down, and more when interest rates go up.

Unfortunately, Guimaraes doesn't give us an example of such an instrument. But he does assert at the beginning that "emerging countries are always borrowing in order to pay their debts". Which is kinda funny in a world where emerging countries are quickly becoming the world's biggest creditors.

Meanwhile, of course, emerging-market countries have already discovered their own solution to the problem of enormous dollar debts: it's called long-dated local-currency bonds, and it has worked extremely well.

And if a country did want to protect itself against rising real interest rates in the US, there are probably much easier ways of doing that than trying to fundamentally restructure the entire architecture of international sovereign debt markets.

But Guimaraes's proposal doesn't even work in theory. The problem, as he paints it, is that emerging-market countries are "always borrowing" and that such borrowing becomes very expensive when interest rates rise. His solution, it seems, is for those countries to borrow at lower rates when interest rates rise. What a great idea! Except – who on earth will lend to a country at low rates when there are much higher interest rates everywhere else in the world?

This idea needs a little bit of work, I think.