What role does domestic debt play in countries external debt defaults?
The difference between external and domestic debt, at least as Carmen Reinhart and I define it in our book This Time is Different, is that external debt is legally enforced in another jurisdiction, usually London, New York, Paris, or Tokyo, while domestic debt is enforceable in the issuing country’s courts. It has widely been believed by policy-makers and scholars that domestic debt was relatively unimportant for most emerging markets, until relatively recently. One thing we show in our book is that this is not true. For much of history, domestic debt was large and important, even in emerging markets. When you take it into account, it helps explain why countries have seemed to default at such low levels of external debt. That’s not to say that domestic debt and external debt are necessarily the same — you can partially default on domestic debt through inflation and there are different penalties to outright default, but still, the repayments have to come from the same pool of funds. I t
