Domestic Debt Restructuring, Central Bank, and Monetary Policy in EMDEs: Lessons from Recent Country Cases - Center for Global Development

The Center for Global Development has published a study examining how domestic debt restructuring interacts with central bank operations and monetary policy in emerging markets and developing economies (EMDEs). Drawing on recent country cases, the work focuses on a tension that receives less attention than external debt crises: when governments restructure debt held largely by domestic banks, pension funds, and the central bank itself, the process can blur the line between fiscal and monetary policy.

That matters for markets because domestic debt is the backbone of local banking systems and the collateral used in central bank liquidity operations. A restructuring can alter bank balance sheets, affect the transmission of interest rate decisions, and influence inflation expectations — channels that standard sovereign risk analysis often underweights.

For observers, the key question is how central banks preserve credibility when they are simultaneously a monetary authority and a holder of restructured government debt. The lessons highlighted in the research suggest watching institutional safeguards, the treatment of central bank holdings, and whether price stability mandates remain intact. These design choices shape how smoothly an economy absorbs the restructuring and how investors subsequently price local-currency assets.