Does existing debt at a fixed rate in local currency really just functionally disappear? What about variable rate loans – do rates get up in the 100s or 1000s? Do all new lending activities cease, or are they issued in a different currency? Do credit cards stop working? And how is all this money entering the economy? If, in the example of bolivia, the bolivar is losing 99% of its value in less than a year for multiple years, then are employers re-calibrating salaries like every week?
In: Economics
Yes, if a currency is subject to hyperinflation, then debts owed in that currency quickly become effectively worthless.
Some institutions try to stay on top of this by keeping interest rates locked with the inflation rate, but this becomes untenable fast, the true inflation rate can move a lot faster than any central bank is even able to measure it.
Variable rate loan contracts will specify some terms under which the interest rate can change, but usually the contract terms don’t simply allow the lender to decide on a new interest rate whenever they feel like it. It’s common for such loans to update based on the prime rate either monthly or annually, which might be way too slow to recoup the value lost. So if inflation is moving fast enough, they’re generally out of luck.
Latest Answers