I just came across this particular Debt "Laffer curve" and thought to have a look into it.. This is actually the debt avatar of the actual Laffer curve proposed by Arthur Laffer.. Laffer's argument was that following a growth peak, an increase in income taxes bound to decrease revenues.. This debt "Laffer curve" states that it is good for a country/company to borrow to a certain extent.. But once the debt stock increases beyond a peak to the point where the government/company is unable to repay the loans, growth starts to take a backseat..
Once this phase kicks in, companies no more invest in the country/company and hence the country is affected even more.. This chart gives the probability of the loan being repaid compared to the level of debt stock in hand.. Companies wouldnt invest in a country if they feel that the extra output that they produce tomorrow would be taxed even more to repay the country's increasing debt..
Courtesy: IMF study on External debt and growth..
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