The Structure of Public Sector Debt in Brazil

Abstract

The literature on the end of remarkable inflationary processes (Bresciani-Turroni, 1937; Sargent, 1986) calls our attention to one of the favorable aspects of hyperinflations: the fact that high inflation destroys old debts. Because of the central role fiscal deficits play in chronic inflation, the alleviation of the debt burden helps stabilization, and the fact that a large portion of government debt may disappear without the undesirable reputation costs of explicit debt repudiation is even better. In the Brazilian inflationary experience, most of this potentially favorable effect of high inflation on debt has been neutralized by indexation. In December 1994, officially recognized total federal domestic debt was 19. 9% of GDP. The fast growth of public debt in the first four years of stabilization has offset the benefits of the inflation acceleration, which occurred shortly before the onset of monetary reform in July, 1994. By December 1998, this figure was 44. 8% of GDP.