Public finance as global problem

Question 1

Sources of public debt

Answer 1

1) Public debt – liabilities of the public finance sector
2) Treasury debt – government liabilities
3) The Politics of Interventionism
4) Debt trap

Question 2

1) Public debt – liabilities of the public finance sector are

Answer 2

• Bond issue
• Taking out loans
• Other budgetary commitments of state entities

Question 3

Servicing public debt

Answer 3

1) Interest and discount on Treasury securities
2) Interest on loans
3) Costs of issuing Treasury securities
4) Payments in respect of sureties and guarantees granted by the State Treasury

Question 4

Treasury bonds

Answer 4

1) Issuer – State Treasury represented by the Ministry of Finance
2) Loan for the purposes set out in the Budget Act
3) Domestic and foreign bonds are distinguished
4) Low premium for low risk

Question 5

Consequences of bond issuance on foreign markets

Answer 5

1) Additional exchange rate risk
2) Redistribution of income from debt servicing costs
3) Differences in interest rates on loans
4) No benefits for domestic operators

Question 6

Risks associated with debt accumulation

Answer 6

1) Decline in the credibility of the bond issuer
2) Need for further bond issuance to finance current liabilities
3) Investors demand more and more compensation for acquiring debt

Question 7

Factors of debt growth on a global scale

Answer 7

1)	Individual country models
•	Ageing population – a burden on the pension system
•	Political systems
2)	Global factors
•	Financial crisis 2007-2008
•	Global imbalances

Question 8

Assessment of public debt

Answer 8

1) Subjective criteria used by market participants
2) Prudential thresholds (50%, 55%, 60% of GDP)
3) EU assessment

Question 9

The financial crisis as a factor

Answer 9

1) The need to recapitalise banks
2) Governments take over the debts of financial institutions
3) Costly stimulus programs

Question 10

Debt crisis

Answer 10

1) One of the types of financial crises
2) Excessive public sector indebtedness makes it impossible to repay liabilities on their own
3) The increase in service costs slows down the level of economic growth for a long time

Question 11

Term structure of liabilities

Answer 11

1) Short-term – mitigating the effects of the financial crisis
2) Long-term – related to the structural features of economies, especially the ageing of populations

Question 12

Factors of the crisis in the euro area

Answer 12

1) Problems in peripheral economies
2) Unstable credit booms – an increase in risk in the banking sector
3) Excessive cyclical expansion leading to inflation

Question 13

The course of the debt crisis in the eurozone

Answer 13

1) High price volatility in the financial markets
2) Downgrading of economies’ ratings
3) The need for intervention by EU institutions and international organisations
4) Financial consolidation programs -> decrease in risk premium
5) Capital inflows from more stable economies -> appreciation of CHF, DKK
6) Greece’s record debt – over 200% of GDP
7) Portugal’s problem – excessive public spending + misuse of Structural Funds
8) Ireland’s problem – government guarantees for Irish banks + bursting the housing bubble – > 30% of GDP deficit
9) Spain’s problem – good fiscal policy but unstable credit boom on the real estate market

Question 14

Aid programmes

Answer 14

1) Troika – European Commission, ECB, IMF
2) European Financial Stability Facility
• Issuance of debt securities to raise funds for loans to indebted economies of euro area countries
• Later replaced by the European Stability Mechanism
3) European Financial Stabilisation Mechanism
• European Commission fund based on the EU budget
• Later replaced by the European Stability Mechanism