No. Nothing can prevent the consequences of a problem that isn't solved.
At best a buyers strike (at whatever price/yield an auction failed) would signal to the central bank that the time had come for the bank to become the buyer of last resort at that price/yield and delay the inevitable for a while longer. (see Capital controls and Financial Repression after the jump)
From Nouriel Roubini at Project Syndicate via Tipp Insights, November 10:
With interest rates on government debt having gone from near zero to much higher levels in recent years, rising short- and long-term bond yields have cast doubt on the sustainability of some debts and led many to wonder if a crisis might be looming. While some countries are more protected than others, none is immune.
NEW YORK—Large, growing budget deficits and rising public debt-to-GDP ratios in advanced economies are rattling markets. With interest rates on government debt having gone from near zero (and even negative, in some cases) to much higher levels, rising short- and long-term bond yields have cast doubt on the sustainability of some public debts and led many to ask if a crisis might be looming.
There is no simple answer to this question. In some cases, a country will have large stocks of financial assets—such as foreign reserves held by the central bank, or assets held by sovereign wealth funds or other public funds—that leave net debt below gross debt. But in many aging societies, implicit liabilities of unfunded pension funds and health-care systems are already larger than a country’s formal public debt, which means that the situation is worse than it appears.
A second crucial consideration is economic growth. If the average yield on public debt is lower than the nominal GDP growth rate, and if the primary budget (net of interest payments) is not too negative, the public debt-to-GDP ratio will fall over time. Growth can therefore resolve most debt problems. The United States and other economies that can boost their potential growth with advances in AI and related technologies will have a more sustainable path than those, like the eurozone, where growth is likely to remain slower.
That said, higher growth usually leads to higher real interest rates, which can make debt dynamics less sustainable. And if AI were to cause permanent technological unemployment for large segments of the labor force, the need for a much broader safety net (or even a universal basic income) would create additional fiscal and debt challenges unless it is financed by higher tax revenues.
A third consideration is that issuing a global reserve currency or borrowing in one’s own currency helps. The US dollar’s global reserve status underpins consistent global demand for Treasury bonds, thus allowing the US to borrow longer for less. But this privilege can eventually become a problem if a lack of market discipline leads to unsustainable deficits and debts.
Most other countries are in a different category. Emerging and developing economies tend to borrow in a foreign currency, leaving them with no option to wipe out the real value of sovereign debt via unexpected inflation. By contrast, eurozone members technically borrow in their own currency—the euro—but they all rely on the same independent central bank. As such, they cannot be bailed out unless the European Central Bank sees fit—or is forced—to come to their rescue.
A fourth consideration is market discipline imposed by so-called bond vigilantes. A rise in bond yields or country spreads can force fiscal authorities to cut spending or raise taxes before a crisis occurs. In some cases, the market heads off a deeper crisis, as happened during UK Prime Minister Liz Truss’s historically short tenure. But in other cases—namely, Greece—it takes a formal debt crisis to force the kind of fiscal austerity and debt restructuring or reduction that is required.
A salient question now is whether current market discipline will lead whoever wins France’s presidential election next year to pursue austerity before a debt crisis occurs. Even the far-right populist Marine Le Pen has presented a plan for fiscal consolidation (albeit one that relies on some smoke and mirrors). Moreover, the US itself is not immune. Bond-market discipline became a major factor last year following US President Donald Trump’s “Liberation Day” tariffs and again this year following the start of the war with Iran. In both cases, surging bond yields and corrections in other assets forced Trump to back down.
It also matters for debt sustainability whether we are in a world of fiscal or monetary dominance. When deficits and debts are not sustainable, a credible central bank committed to stable inflation can nudge fiscal authorities to make the necessary adjustments. But if monetary policymakers find themselves merely reacting to fiscal authorities’ decisions, a weak central bank may end up monetizing deficits (“printing money” to buy government debt) and wiping out nominal long-duration debt via unexpected inflation....
....MUCH MORE
Coming to a country near you:
Capital controls and Financial Repression.
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