# Currency Devaluation - As a Means of Paying Off Debt

Currency devaluation will not only affect consumer debts, but it will affect how a country pays back its national debt. If a loan is denominated in the devalued currency, then the debt will be easier to pay off, as the country will have to spend less money paying back foreign investors.

The above quote doesn't make sense to me. Why would the country have to spend less money paying back foreign investors?

Say that at time $$0$$, $$1$$£ is worth $$1$$€. Indeed, like any good or service, a unit of £ can be seen as having a price in € (and vice versa).

At time $$0$$, Alice lends $$10$$£ to Peter. Assume that Peter can actually influence the exchange rate between £ and €.

At time $$1$$, Peter influences the value of $$1$$£ expressed in €, such that $$1$$£ is now worth $$0.5$$€. Peter then decides to reimburse Alice the amount of $$10$$£. The point is that this amount of $$10$$£ is only worth $$5$$ once converted back into €.

Alice, the lender, has lost $$5$$€ between time $$0$$ and time $$1$$. And for her, it was a bad operation given that she lives in a country wherein everything is priced in €.

For Peter, it may have been a good operation over the short term, especially if he does not need to import goods and services from €-based countries, indeed €-priced goods cost henceforth twice as much than at time $$0$$, since he would now need $$2$$£ to get $$1$$€, etc...

That being explained, I do not think that Alice is willing to lend Peter money anymore, at least not in a currency that Peter can influence... She has learnt the lesson and, in the future, she will always write debt contracts which amount will be explictly expressed in the currency that matters most to her, i.e. in €.

• Any question @RyanWalter ? Feb 20 '20 at 18:51
• What is it going to help Alice that Peters borrowings are denoted in euro assuming that Peter can actually influence the exchange rate. Wouldn't he just change the exhange rate to 2 instead of 0.5? Dec 17 '20 at 22:40
• @Jesper potentially "less than nothing" indeed. The point is simply that Peter is not supposed to do so. Actually this is considered an "unfair currency practice". Yet... Putting aside the fact that such practices are not that easy to demonstrate, etc. Dec 18 '20 at 2:15

I think it is meant in real terms. Unless there is a haircut the debt will still have the same nominal value before or after denomination. But in the real terms, after we adjust for the drop in the value of money, the debt is now cheaper to repay in real terms. This is what that website says too but I think they made mistake when they say:

as the country will have to spend less money paying back foreign investors

because the nominal amount will be same (same amount of money) but that money will have less value.

• I’d argue that the quoted passage in the question is outright incorrect. Your argument of being in real terms is probably the best interpretation, but there’s a logical leap from “devaluation” (which is just a currency quote changing) versus a rise in the price level. Unless inflation differentials are extremely high and purchasing power parity valuations kick in, currency value and inflation can decouple. The only way the quote makes sense is if the country repays debt from foreign currencies reserves. Dec 18 '20 at 23:19