A country that is known to elect new leaders cannot credibly precommit to paying back a loan unless it is in a situation that is robust against new leaders refusing to pay back the loans. So you would in fact be bound by the precommitments of your predecessor whether you wanted to be or not, though the exact mechanism can vary depending on exactly what made the precommitment credible.
Suppose the mechanism is that they’re electing people that care about the country. Would this mechanism work? Would you and the other leaders consistently pay back loans?
If the mechanism didn’t work, then the precommitment wouldn’t be credible, and the people making the loans would have known that there is no credible precommitment.
And thus the country will fall. Since the leaders care about the country, they’d rather pay back some loans than let it fall, so the mechanism will work, right?
That’s highly misleading. Empirically, many countries have successfully raise debt, and paid it back, despite debt-holders having no defense against a new leader wanting to default.
I think one defence those debt-holders have is that those countries have traditions of repaying debts.
Another is that, regardless of whether you’re formally committed to repaying loans, if you default on one then you or your successors are going to get much worse terms (if any) for future loans. So a national leader who doesn’t want to screw the country over is going to be reluctant to default.
A country that is known to elect new leaders cannot credibly precommit to paying back a loan unless it is in a situation that is robust against new leaders refusing to pay back the loans. So you would in fact be bound by the precommitments of your predecessor whether you wanted to be or not, though the exact mechanism can vary depending on exactly what made the precommitment credible.
Suppose the mechanism is that they’re electing people that care about the country. Would this mechanism work? Would you and the other leaders consistently pay back loans?
If the mechanism didn’t work, then the precommitment wouldn’t be credible, and the people making the loans would have known that there is no credible precommitment.
And thus the country will fall. Since the leaders care about the country, they’d rather pay back some loans than let it fall, so the mechanism will work, right?
That’s highly misleading. Empirically, many countries have successfully raise debt, and paid it back, despite debt-holders having no defense against a new leader wanting to default.
I think one defence those debt-holders have is that those countries have traditions of repaying debts.
Another is that, regardless of whether you’re formally committed to repaying loans, if you default on one then you or your successors are going to get much worse terms (if any) for future loans. So a national leader who doesn’t want to screw the country over is going to be reluctant to default.