of gdp, but given its considerable assets net debt is about 110 per cent of gdp. 12 sustainability of government debt is to a large extent determined by a country ’ s governance system, tax system and growth capacity. developed democracies with sound public financial management and solid institutions have a considerable capacity to collect taxes to service debt. in developing countries and emerging economies, where tax collection and institutions are weaker, debt tolerance is lower. in addition, borrowing costs tend to be higher. on the other hand, they have greater scope for growing out of high debt. ( see chart : debt at the time of default. ) when the euro area was established, the growth and stability pact stipulated that a country ’ s budget deficit should not exceed 3 per cent of gdp and that debt should not exceed 60 per cent of gdp. when france and germany were among the first countries to breech the criteria in 2003, the rules of the game were changed. this influenced the discipline of the other member states. it would almost seem that several countries viewed the limits as a floor rather than a ceiling. sejersted, francis ( 1973 ) : ideal, teori og virkelighet. nicolai rygg og pengepolitikken i 1920 - arene ( ideals, theory and reality. nicolai rygg and monetary policy in the 1920s ). j. m. keynes ( 1919 ) : the economic consequences of the peace. keynes probably based his argument on the assumption that the payments would constitute a far larger share of the national income than indicated here. international monetary fund ( 2010 ) : “ navigating the fiscal challenges ahead ”, fiscal monitor. the crisis set in motion a dangerous debt dynamic, which can be illustrated by the following simple formula 13 : where changes in public debt ( on the left ) are determined by the variables on the right : the interest rate on the debt, nominal economic growth in the country and the budget surplus or deficit excluding interest expenses, referred to as the primary balance. if the changes in debt ( left side ) are set at zero, the right side of the formula yields various conditions that must be met to achieve stable sovereign debt. if the interest rate is equal to gdp growth, the debt will be stable when the government budget excluding interest expenses is in balance. if the interest rate is higher than the rate of growth, the debt burden will be heavier and the government budget will have to be settled in surplus before interest payments. if gdp growth is higher than

reemploy real capital and labour. debt arrangements for governments can play a similar role and counteract downward spirals. ( see chart : inflation. ) there are two forms of debt default. breach of contract is one form where the borrower fails to honour the contractual obligations, as illustrated in the example here. for debt denominated in domestic currency, the state can also default by pursuing an inflationary economic policy, reducing the real value of the loan. over the past 100 years inflation in norway surged during the two world wars and during the korean war. the last period of soaring inflation was in the 1970s and 1980s, which resulted in a sharp fall in the real value of the bonds issued in the 1950s and 1960s. i would also like to cite a curious example from our own monetary history 9 : the norwegian state took advantage of a fall in the value of money when it was to redeem government bonds issued between 1896 and 1909. france was one of the primary bondholders. the bonds were issued during the gold standard period when the value of the krone was directly linked to the value of gold. the lenders were promised repayment in “ monnaie d ’ or ” ( gold coins ). when the bonds fell due, the norwegian government insisted on repaying the debt using banknotes that had lost a substantial share of their value. france took legal action. the case was brought before the norwegian supreme court in 1962, and the court invoked a law from 1923 stipulating that the gold clause, i. e. repayment in gold coins, did not apply when the redemption obligation was suspended, which it was definitively in 1931. the supreme court also invoked “ society ’ s vital interests ” in its argumentation behind the decision. the cost of repaying the gold coins that were borrowed 60 years earlier would have been excessively high for norwegian state. the ruling is probably an example of the limited benefit to be gained by a creditor when such a case is tried by the debtor country ’ s legal apparatus. for nicolai rygg, governor of norges bank from 1920 to 1946, the value of money was a moral issue. the aim of the policy of gold parity in the 1920s was to bring the krone back to the value prevailing before world war i : “ our monetary regime is enshrined in law. ( … ) the regime is anchored in our legal system, which we cannot break down. inherent therein is a moral