The first path is usually known by the pejorative sobriquet of financial repression. Carmen Reinhart and M. Belen Sbrancia recently discussed this possible path. They concluded, by examining episodes of past high indebtedness, that states restructure their financial systems in periods of crisis in such a way as to allow them to create "captive audiences." Banks, pension funds, and other long-term debt holders are "encouraged" through capital controls, interest-rate ceilings, and other devices to hold a large amount of government bonds. The government then pays a low nominal interest rate on the bond while running a near-balanced budget with a positive but small rate of inflation. This creates an effective negative real interest rate on the bond such that the value of the debt shrinks over time.

Mark Blyth, Austerity, loc. 651