Public Debt Sustainability

Question 1

Role in crisis

Answer 1

Guides policy makers to maintain current fiscal operations avoiding debt spiral

Gives investors possibility to assess the solvency of a gov fiscal path

Question 2

Debt spiral

Answer 2

High level debt/GDP ratio –> growth rate decreases but that is denominator to the ratio therefore ratio increases

Question 3

Reinhart and rogoff 2009

Answer 3

Debt to GDP ratio > 90% real growth rates = significantly lower -> harder to stabilise debt

Question 4

Solvency

Answer 4

Country is solvent when it could repay all its debts by running surpluses and selling assets at market value

Question 5

Liquidity

Answer 5

Country is liquid when has resources needed to meet payment obligations when they mature

Question 6

Vulnerability

Answer 6

Weakness in revenue structure or expenditure policy –> unsustainable fiscal situation
Uncertain path of revenue = vulnerable

Question 7

Law of motion of debt eq

Answer 7

Dt = (beta)t d(t-1) -bt-st

Beta = 1+ rt / 1 + gt

Question 8

Meanings of equation notations

Answer 8

Dt = stock gov debt at end year t
Bt = primary non interest fiscal balance (T-G)
St = non debt creating flows (selling assets)
it = AV nominal interest rate on gov debt
Rt = AV real interest rate
Pit= inflation rate
Gt= real growth rate of GDP

Question 9

What does law of motion depend on

Answer 9

Directly on:
Real interest rate
Debt/GDP at start of period

Indirectly on:
GDP growth rate
Primary fiscal balance
Any non debt creating flows to the budget

Question 10

What assessing feasibility must consider

Answer 10

1. Feasibility of attaining the revenue and expenditure forecasts in gov budget
2. Affordability of key programs
3. Structure of public debt - too much short debt may cause liquidity crisis
4. Fiscal contingencies. Gov guarantees to state enterprises/banks may cause debt ratio to rise suddenly as consequence of baking crisis and mismanagement of state enterprises