Financial repression is understood as the ability of indebted states to “extract surpluses from debt holders, unexpectedly devalue that debt, and receive a discount on the debt due to the flow of services it provides to their holders living in segmented financial markets.”
“Financial repression is, in broad terms, a tax on debt holders,” summarized Reis in the written communication that served as the basis for the lecture.
Speaking on the second and final day of the 26th Jacques Polak Annual Research Conference, on the theme “The Evolving Landscape of Global Trade and Financial Integration,” the economist and professor at the London School of Economics (LSE) recalled that, between the end of World War II and the mid-1980s, “financial repression was the norm worldwide.”
“Four decades of truce later,” the phenomenon is returning, he stated, as a result of “a combination of high debt levels, large and growing global macroeconomic imbalances, the availability of repression policies through the many financial mechanisms created after the great financial crisis, and recent inflation rises.”
For the economist, “the revenues from repression” can “be significant and will be tempting for policymakers struggling to balance the budget.”
Assuming that “large ‘stocks’ of public debt and gross external liabilities” – described as “twin debts” – lead policymakers to extract resources from debt holders, Reis characterized three forms of financial repression.
The first involves direct taxes on the financial sector, “which can be high when countries face financial crises.”
However, governments usually only resort to such heavy taxes “in extreme circumstances.”
The second form is “unexpected inflation or currency depreciation,” which reduces the real value of the debt and was particularly significant between 2021 and 2024. During this period, “a large portion of the increase in public debt during the pandemic was absorbed by inflation.”
“Inflation devalues all government debts since they are typically denominated in units of the national currency. As inflation comes hand in hand with currency depreciation, it also affects foreigners, relaxing the constraint of external debt,” he added.
Finally, the third set of financial repression policies are those that create “discounts on the return the government or country pays to creditors,” particularly regarding interest on debts, below what would be fair or expected.
Regarding external debt, financial repression “consists of government policies that act on foreigners and allow the country to sustain more external debt with lower trade surpluses.”
Examples include customs tariffs, currency depreciation, and financial regulations “that require foreigners to hold government bonds to lend in local currency, increasing the discounts.”
Evaluating the potential of different types of repression available to governments for raising resources, Reis analyzed recent repression policies and the IMF’s role should this type of repression become “more active.”
He concluded that “today, in 2025, it might be more challenging to significantly devalue public and external debts. Creating unexpected inflation is more difficult than it was in 2021; institutionally independent central banks would struggle to foster many years of persistent inflationary surprises, unlike the 1970s, and the short duration of unindexed private debt limits the extent to which it can be devalued.”
