- Aug 21, 2009
- Reaction score
- Political Leaning
But notice that in the Russian case their reserves were demanded to be paid in other currencies that weren't their own. When a country does that it puts them at a default risk. A monetarily sovereign country never has that risk.
I think we've already had this discussion, but for anyone new to the forum here it goes again.
You're right. Technically, a country that prints its own currency and allows it to float freely can't default in the sense that it can always pay off its debts in the form of depreciated currency. But it might find it advantageous under certain circumstances to force a devaluation by re-pegging the currency at a lower value against other currencies. I can see this happening if a country is drowning in debt and has been unsuccessful reflating because so much of its productive base has been hollowed out in a "bubble economy." Also, people will hold a currency only as long as they have faith it will maintain all or substantially all of its value while they hold it. If someone buys a bond, he expects to get back his purchasing power in real terms plus interest. So if he expects the real value of the currency to drop, he's going to demand a higher rate of interest. If he doesn't get it, say, due to purchases by a central bank, he'll sell the currency and shop for return elsewhere.