Countries in a fiscal mess have four options –

1. Cut government spending and increase taxes to balance books
2. Create inflation so that the real interest rate paid to bond holders is diluted. It operates as a kind of tax on foreign creditors.
3. Currency devaluation which only works if the country has borrowed in its own currency. This allows repayments to foreign creditors in their own currencies at a discounted rate. It damages foreign creditors without affecting domestic creditors
4. Default – hands up – we cannot pay. – Argentina, Dubai.