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Fiscal Policy and Workouts from Debt Crises: The Case of Indonesia's Domestic Debt

Azis, Iwan

Much of the discussion of the risks of sovereign debt crises has focused on the issue of currency risk (see Dodd and Spiegel, 2005). This has led to the recommendation that countries should borrow in their local currency. Yet in the drive to develop local markets, many countries are running up domestic debt burdens. Although domestic debt has the advantage over foreign debt that it is not subject to a currency mismatch, countries are still forced to use scarce budget resources to repay the debt, and if the debt gets overly large, a country can run the risk of a debt crisis. There are many reasons that some countries have begun to accumulate large domestic debt burdens including financing external debt buybacks, sterilizing capital inflows, or financing domestic programs. In Indonesia's case, a costly bailout of the banking system following the 1997 crisis left Indonesia saddled with a domestic debt burden.

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Academic Units
Initiative for Policy Dialogue
Publisher
Initiative for Policy Dialogue
Series
Initiative for Policy Dialogue Working Paper Series
Published Here
February 1, 2010

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The opinions expressed in these papers represent those of the author(s) and not The Initiative for Policy Dialogue. These papers are unpublished and have not been peer reviewed. Please do not cite without explicit permission from the author(s).

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