different from the taxpayers’ interests 6 (but no government would say so). Second, ideology, such as the belief that being more friendly with creditors(i.e. showing that the government is willing to put immense pain on its people to repay debts) will increase confidence and investment in the economy, may shape debtors’ decisions. Third, there may be short-term political economy incentives to side with creditors’ common views, when not reaching a deal in a debt restructuring proves too costly for an incumbent government. Defining the relevant constraints for debt sustainability entails taking a stance not only on how to address the distributional conflict between the debtor and its creditors but also, to some extent, on the inter-creditor conflict, as this part of the analysis also requires determining the debts to be included in the perimeter of debt to be restructured. In restructuring processes, discrepancies may arise over the eligible debt for restructuring based on currency, residency, jurisdiction of issuance(law), and even the type of creditor(Guzman and Stiglitz, 2023). For instance, the inter-creditor conflict will be influenced by the decision of whether to pool local currency and foreign currency debt or just include foreign currency debt in the constraint that will define the universe of debt for which there is rollover risk(in the IMF DSA, this constraint refers to the gross financing needs, as we analyse below), or whether to include or exclude the debt of the state-owned enterprises. 6.2 The endogenous effects of macroeconomic and fiscal policies on debt sustainability The primary fiscal balance is an endogenous variable. Spending and tax decisions have endogenous feedback effects on economic activity and hence on tax revenues – mathematically, the primary balance is a fixed point, meaning that it depends on economic activity while economic activity depends on both the variables that determine the primary balance, i.e. taxes and public spending. There may also be multiple possible equilibrium policies(including debt repayments) rather than just one fixed point. And there may be, within the set of admissible policies, a maximum feasible repayment. Similarly, the trade balance, which determines the availability of foreign exchange, is also an endogenous variable. Austerity policies that undermine the productivity of the tradable sector, such as cuts to public spending in knowledge or infrastructure, may decrease exports in the future. On the other hand, austerity policies that depress economic activity also contract imports, and ceteris paribus, that leads to more availability of foreign exchange in the short term – which at times creates the seemingly puzzling situation in which the deepening of recessions is associated with both an increase in short-maturity foreign currency bond prices(which reflect the larger probability of repayment in the short term given the larger availability of foreign exchange) and a reduction of the long-maturity foreign currency bond prices(which reflect the lower probability of repayment in the long term given the damage to the productive capacity of the tradable sector of economy). In debt negotiations, there are often discrepancies between creditors and debtors in views over the size and even sign of the multiplier effects associated with fiscal policies. Typically, creditors claim that the contractionary spending policies will boost confidence and hence investment. On the other hand, the debtor is more concerned about the negative multipliers on economic activity of contractionary policies, and especially in situations where factors of economic production are under-utilized. In several cases over the last couple of decades these discrepancies between perspectives became very prominent. These include Greece in the 2010s(see Varoufakis, 2016), Argentina following the default of 2001(see Guzman, 2020), or the ongoing case of Puerto Rico(see Gluzmann, Guzman and Stiglitz, 2018). The evidence overwhelmingly supports the prediction that contractionary fiscal policies in such situations is contractionary and that well-financed expansionary policies in recessions contribute to recovery(see Jayadev and Konczal(2010), contrasting Alesina and Ardagna(2010); Blanchard and Leigh(2013); Auerbach and Gorodnichenko,(2012)). Creditors have incentives to overestimate the“confidence effect” or underestimate the fiscal multipliers, to preserve the possibility of higher payments in the upside scenarios – this force may prevail in the creditors’ view even if there are efficiency losses associated with unsustainable debts or restructuring processes. 6 For example, when they have been captured by creditor interests. Series: Debt Sustainability Assessments& Their Role in the International Financial Architecture 6