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Really confused by this. Say debt burdens increase and country A now has to spend more of its income towards servicing its debt to country B, causing a fall in consumption. Country B now has more money to spend on buying goods and services from A though which should make up for the fall in consumption in A by increasing exports, leaving GDP unchanged.

Obviously that’s not what has happened in debt crises like the Greek one as GDP has fallen dramatically so what exactly am I missing?

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  • $\begingroup$ It's probably a bad assumption that B's imports from A increase by the amount of the increase in debt of A multiplied by the interest rate. Are you assuming a simplified economy where B is the rest of the world that is not A? Are you assuming that country C exists or that other countries exist? B can import more from C. Are you assuming B cannot borrow from C ? $\endgroup$
    – H2ONaCl
    Commented Sep 15, 2022 at 16:11
  • $\begingroup$ Too much for one comment so I'm continuing here... It's also a bad assumption that B's imports from A is constrained by the interest payment (and in the non-steady state, the principle repayment). The debt service cash flows of A do not necessarily increase when the debt burden increases. For example A can simply stop paying. $\endgroup$
    – H2ONaCl
    Commented Sep 15, 2022 at 16:11

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