Public Debt, Political Cycles and Capital Markets

Management of the public debt is a critical aspect of fiscal policy. Emerging countries – and Latin American economies in particular – are faced with a difficult trade-off. Pressing needs in infrastructure and social spending require public borrowing in order to boost development and economic growth, but “high” levels of debt are notoriously costly. Negative perceptions in the public markets about the management of sovereign debt, or the threat of default, increase the vulnerability of public finances and may even slow economic growth. In this context, seeking optimal fiscal rules and good public debt management are critically important to a country’s growth prospects. 