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I think it's helpful to think of it like this: They owe $100 but don't have $100. They find someone willing to exchange $100 for 100 Bolivars. But instead of u

I think it's helpful to think of it like this: They owe $100 but don't have $100. They find someone willing to exchange $100 for 100 Bolivars. But instead of using Bolivars the government has on hand (reserves), they print them. This devalues the Bolivars, meaning the next time they try to buy dollars, they'll have to put up more Bolivars than before. The counterparty in this case, is anyone who thinks they can buy something with Bolivars equal to $100 worth of goods. Chances are that they can. But they have to act quickly before another devaluation. This is overly simplified but covers the gist of it.

lumost 6y ago
Depending on the nature of the debt there is also the possibility that it’s denominated in local currency e.g. pension obligations. In such a case the counter party may not have a legal recourse other than accept the inflating currency.
clairity 6y ago
putting aside the currency exchange mechanics, my question is more that if a sovereign debtor wants to give me a trillion bolivars of debt payment, but has a 1000 pounds of ready coffee beans, i'd demand the coffee beans rather than the bolivars because that won't devalue in the global economy nearly as quickly. certainly this can only work if the country has enough various goods worth more in other currencies than they have debt in their currency. it's almost like an arbitrage, but it's not entirely riskless (which by definition, arbitrages are).
- lumost 6y ago
  ^ counter-parties can balance their books in this manner and are likely to do it more efficiently than loan officers. Hypothetically, your example can be performed at an arbitrary scale with the only constraint being how fast the currency devalues prints and how fast you can turn bolivars into coffee beans, gold, or other hard goods. additionally, the government may not have rights to the beans. In cases where governments can expropriate assets and goods from individuals, they have used them to directly raise foreign currency. A notable example of this is the Ukrainian famine.

lumost 6y ago

Depending on the nature of the debt there is also the possibility that it’s denominated in local currency e.g. pension obligations. In such a case the counter party may not have a legal recourse other than accept the inflating currency.

clairity 6y ago

putting aside the currency exchange mechanics, my question is more that if a sovereign debtor wants to give me a trillion bolivars of debt payment, but has a 1000 pounds of ready coffee beans, i'd demand the coffee beans rather than the bolivars because that won't devalue in the global economy nearly as quickly. certainly this can only work if the country has enough various goods worth more in other currencies than they have debt in their currency. it's almost like an arbitrage, but it's not entirely riskless (which by definition, arbitrages are).

lumost 6y ago
^ counter-parties can balance their books in this manner and are likely to do it more efficiently than loan officers. Hypothetically, your example can be performed at an arbitrary scale with the only constraint being how fast the currency devalues prints and how fast you can turn bolivars into coffee beans, gold, or other hard goods. additionally, the government may not have rights to the beans. In cases where governments can expropriate assets and goods from individuals, they have used them to directly raise foreign currency. A notable example of this is the Ukrainian famine.