I have encountered this problem on two very different boats with engines of this widely used series. Yet tracking down the answer for me took several years. One boat was a 1998 Beneteau Oceanis 311 with the 2-cylinder 18hp MD2020 engine. The boat I co-own now is a Westerly Corsair 36 that was re-engined in 1997 with a 3-cylinder 28hp MD2030. A friend had an MD2020 with exactly the same problem in his Moody 31S and his was the only clear description of the problem and its solution that I found at that time on the internet.
Unlike the earlier MD200x series (such as the 28hp MD2003 as originally fitted to the Westerly Corsair) the MD20x0 series have indirect cooling, with freshwater coolant including antifreeze, cooled in a heat exchanger. The engines were built in Japan by Ishikawajima Harima Industries and widely used in tractors, generators etc. They were supplied to Perkins who marinised them and sold them as the Perama M30. Perkins then supplied them to Volvo Penta who put their expensive stickers on them. These are rugged, basic and reliable diesel engines.
In both cases I was puzzled to find blue coolant in the bilge under the engine, especially after pushing the boat hard, but the coolant in the heat exchanger remained at the correct level. Sometimes I could see some steam in the exhaust and occasionally the overheating alarm would come on. However, I soon learnt that the alarm would stop if I kept my nerve and reduced revs to little more than tickover. Stopping the engine would only cause the engine to overheat even more.
There were many scary suggestions on internet forums about blown head gaskets, cracked engine blocks, leaking tube stacks, blocked seawater intakes and so on. At the suggestion of some forumites, I tried using hydrochloric acid (muriatic acid, brick cleaner, Rydlyme, etc) to dissolve deposits, but with only slight and temporary improvement.
One fine day, on a cruise across the Thames Estuary, I did a visual check of the engine and saw to my horror that seawater was spraying around the engine bay from a split in one of the rubber end caps on the heat exchanger. The exhaust elbow (in my case the exhaust “riser”) was so blocked with deposits that the back pressure on the seawater coolant was inflating the end caps like balloons. As the seawater and freshwater coolants are kept apart only by a couple of jubilee clips at each end of the heat exchanger, seawater was being forced into the freshwater coolant. The excessively pressurised the freshwater coolant was forcing its way past the filler cap, which acts as a pressure release valve, into the bilge. Having tried to clean out the exhaust riser with acid and with a piece of splayed rigging wire mounted in an electric drill, I reassembled the exhaust and put on new end caps. Unfortunately, this did not solve the problem. In the photo you can see in a cut section across the exhaust riser how the rock-hard deposits were blocking the galleries. Needless to say the tube stack in the heat exchanger was full of gunge and the coolant was brown and filthy when I drained it.
Finally, I bit the bullet and forked out an eye-watering amount for a new VP exhaust riser, the last one available in the country I was told. Risers are the equivalent of an exhaust elbow for an engine mounted with the exhaust below the water line, but considerably more expensive, even though it’s just a lump of cast iron. Third-party ones fabricated from stainless steel are advertised but none were available when I tried to buy one. Anyway, with the new riser, the cooling problem completely went away and the engine ran noticeably better. Apparently, this problem is very common and Volvo Penta regard these expensive engine parts as “service items” to be replaced every 5 years or so. But why was it so hard to find the solution?