Debt consolidation reflected in historical data
The historic highs in global debt give reason to focus on successful consolidation processes in history, said economic historian and economist Rui Esteves at the joint event of the House of Finance, the Leibniz Institute for Financial Research SAFE and the Institute for Banking and Financial History on 30 January 2025, at the House of Finance. Esteves teaches international history and economics at the Geneva Graduate Institute and this year, is the ninth visiting professor to hold the Visiting Professorship for Financial History* at Goethe University.
Debt consolidations have received far less attention in research to date than sovereign defaults, emphasized Esteves. The return of high inflation rates, a supposed vehicle for lowering the government debt ratio, would be another reason to subject historical government debt consolidations to an intensive analysis to put assumed causal relationships to the test. Esteves presented the results of his research project, which was based on a data set containing information on consolidation processes from 220 years (1800-2019) in 183 countries.
Sustainable debt reduction requires more than simple debt relief
To demonstrate the key drivers of successful debt consolidation, he and his co-authors developed a framework in which the contribution of individual factors to debt reduction, such as budgetary discipline, economic growth, interest rate trends and inflation could be determined in more detail. The analysis allows numerous conclusions to be drawn - including on structural features of government debt that influence the ease to consolidate debt, including its maturity, and indexation of debt to domestic prices or foreign currencies.
The evidence showed that consolidations have historically been far more important for the reduction of government debt ratios than unilateral debt defaults or debt relief: that they had a larger and more sustainable effect on debt ratios than unilateral solutions and that their success does not depend on whether the countries in question are low, middle or high income.
Esteves then qualified the relation between inflation and debt consolidation: even though large unexpected bouts of inflation can reduce debt ratios, markets usually catch up by requiring higher yields to compensate for expected inflation. Successful debt consolidations, according to the visiting professor, tended to take place in moderate inflation scenarios, often associated with sound monetary and fiscal policy environments. The later phase of the classical gold standard and the post-1990 Great Moderation are cases in point. In these periods, stable and low inflation was still able to contribute significantly to debt consolidations without destabilizing the market for public debt.
* The Visiting Professorship in Financial History at the House of Finance at Goethe University is endowed by Bankhaus Metzler and the Friedrich Flick Förderungsstiftung.
