Central bank debt: can it be cancelled or not? 🔴


Can central bank debt be cancelled or not? Can it be monetized?

The answer is yes, under certain conditions. Let’s see for a moment how, let’s make some very trivial examples.

When I borrow an amount, let’s say I borrow $100, I have to return it in a certain time. Let’s pretend that I have to pay them back in five years, let’s pretend that the coupon is equal to the interest rate, so, in the next five years, I’ll have to pay 2%. Basically, after five years, I’ll pay five times this 2%.

If I want to restructure the debt, I go to the bank and say: “no, I’ll pay you back in ten years”, what happens? In the tenth year, I’ll always have to pay back this $100 and, of course, in the next five years, I’ll have to pay back those extra coupons. No impairment for the creditor, because the present value of case one is identical to that of case two.

I can also do another thing and I can say: “feel the interest I do not pay during, I cumulate and I pay you all at the deadline”. Obviously the amount will not be 2% for 5 years = 10%, but a little more because I pay them a little later and then there is a cumulative value. Even in the second case I could pay interest at the due date and, of course, the value will also be greater than 10%.

So what can I do to clear a debt?

I can extend the maturity to restructure the debt and bring it to a maturity n, provided that the creditor repays the value of the debt and an increasing amount of interest rates. And now comes the beauty, the magic. Let’s say that interest rates are zero, how does our model transform? In a debt restructuring that can be infinite, perpetual, I practically have to give back the 100 dollars to infinity, that is never, without ever paying interest rates. And that is how this restructuring does not even exist: it turns the debt from five years to ten years, in perpetuity, rates are zero and the thing closes there without any loss of balance sheet for the Central Bank.


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