The Rise Of External Debt?

CHINA FINANCIAL - Report 22 May 2014 by Michael Pettis
Executive Summary There have been cases in recent history in which a country experiencing “miracle” growth – driven by domestic investment that, in late stages, tends increasingly to misallocation – has reached domestic debt capacity constraints, only to replace domestic funding with external funding. When this happens there are at least two negative and one positive consequence. Of the negative consequences, first, switching to external funding increases the country’s balance sheet fragility and subjects it to the risk of a “sudden stop”. Second, by relaxing domestic financing constraints ...

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