Main 5 Tranistion(1)

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Goal: Organize as many articles.

Schedule: 1 page atleast a day. Start combing everything in this word window in the middle of next

week. Then read everything, especially the structure part and everything below. Take time to organize

and think how you will go about it. Review question and how close you are to it. Then start comparing,

contrasting, critiquing and analyzing (synthesizing) by middle of next week.

(overall plan, take it in bits like uni..however we were given directions, here i have none, the scope is my own and i dontnow even basis of the topic. So i red a good base article and could have been book too....then three parts, read asmany articles as oble, try to arrange tem and critique them and all [start off with kind of review to get myself startedactually on a new topic and on academic writing]. Along the way i need to decide scope, questions, issues etc., actuallythe main question/topic, smaler questions, issues shod have been defined earlier, but i m keeping it easy for myself andmy later academic writing can be more specific...)

This Can be first article, maybe like uni, start simple 3000 words, a review type of an article and then go on to dospecific articles. In the article, for critical appraisal, use 3Cs and 1 J(ustify as well as being objective, your work isnt ina vaccum) (with a sceptical, suspicious stance, also taking an innovative way of solving a problem or looking at aquestion or preseing it etc, like martyn used to say) and (give your own thought into it and at the end make up aconclusion and your mind), and for style, --as its a review type article so go for 3W and 1 H, ask smaller questions, startbroad and go simple etc (however should be uptodate and new). BUT we never did review type articles at Uni???!, we

just did critiquing of different types on specific topics.... unless we/i do a literature review from which we DERIVEFURTHER QUETSIONS...so what should i do??..THINK In transitionary mode.. Also should you not read latest stuff, toknow latest issues and then carry on?>? how culd you connect research theory and empeiricail IMF thing? Make

outline. RememberAssumptions, premises. Explicit or implicit are limitations and cabln be used ascritiques...as can be other limitations.--RememberKnow your audience and purpose of writing.(see organizingresearch folder as well for some addons and tools)what about empirical and other kinds of evidences?

Remember, tell why research is different, what it adds and uses n implications,, its limitations and future suggestions-See book onstudies such as buylogy, business exposed or david fink or whatever what drives us (a book on motivation) and several others

Big research, impatful suff, MIGHT be too OBVIOUS, or just the EXACT opporits ehwt apeopel think > shocking, like Drive whatmotivates us, the LSE guys book on Business in sights or buyology. Stanford PhD however is abouty interdisplinarystuff I think

==

===

Below I have so much discussion with myself that they canliterally be a series of questions, articles and reports. Do gothrough them again

Possible STRUCTURE and conclusion:

I am Planning to divide the article such that the main article will be based to look at ratios and all thethings, and in the end i conclude that we require each factor it seems for different problem, different


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time horizons even, maybe, as I believe. The conclusion is already there

then we can see IMF framework, moodys frameworks etc

What I mean is that I will use all the MAIN article information and expand on it and write a conclusion

at the end , where I think that all these things, ratios and all, can be used to asses sustainability,

however it seems some can give an earlier indication and we can then move on to other criteria to

see it indepth. This point is also related to what I mean when I say, what factor is used depends ons

on how on the verge the country is , how immediate the problem is. However what tools/criteria are

used to assess and what they mean can also differ depends on the countrys structure, debt structure,

economic structure etc e.g. as the main article has mentioned some ratios are good and some are not

in certain situations. THIS IS MY CONSLUION FROM THAT (main article and other arguments I will

put in there).

We can then go on to compare and contrast the different frameworks being used. (but before tat

maybe compare and contrast more theory than just main article)

!!! Therefore comparing and contrasting theory and practical among themselves and between eachother, pointing out what is right, wrong and what needs to be added!!!

Possible Question::::::::::::::Is Greeces debt sustainable or will it default? How to find out?

Disclaimer: Well actually, if this is the question then the answer will be different. As Greece is on the

edge, its inflows and outflows are different. Inflows are dictated by EU, and its support programme

and outflows also dictated by the austerity. No debt in market. It is better to understand what Greece

went through recently and what it is going through especially with all the European support or

whatever and also important to see who owns greek debt i.e. the banks and what is the origin of the

debt. In any case my questions seems to be about recognizing debt sustainability in general and not

Greece in specific (what was the original motivation, but that time it seems has gone..or is it??). See

also what greece is up to in terms of derivatives or deferred payments or other bubbles

So important to see how a countrys sustainability is assured, for now and in long run...but the

question is when will a country default?? Can i buy

high yield bonds, it coud be long term , as wlel as

immediate. And might include more than just figures

(but again, has the time for this question about a

country being on the edge, gone? And should i just


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practice? Or should i actually answer this specific

question...)

The uniqueness or contribution to literature that I might be able to bring is by

demonstrating how to determine if a country will default or will survive a default depending

on seeing how likely it will be RESCUSED which will be determined by donors, debtors,

and/or IMF, WORLDBANK guidelines and maybe even short term special case objectives in

extreme cases (Asian/European crisis), which might include reducing the impact of

contagion i.e. i think how likely will the countrys insolvency impact other/global markets.

What i really wanted, MAYBE, was at the end of the day to note if high yield bonds should

be bought i.e. countries which are highly risky or even at the edge of chaos, will they be

saved?? Will their bonds last?? Maybe IMF and others have to let go of usual clauses, rules,

and paramaters, and if so, what are they?? (and say, after a haircut/bail in/bail out, will their

economies last for us to invest in equities??, thats another question). OR the question can

be, debt sustainability in crisis or something. Afterall, my motivation is about bond markets

in crisis....DECIDE!!!

Also

> I think talking about debt is too general, maybe I should concentrate on

government rather than external debt. The factors will differ sepending on the

Structure of debt (private/public or external/internal), but i will keep it public debt, as

it is easy. also because i found more on govetnent debt :) and what kind of economy

(emerging, advanced) and at what stage of debt (good condition, in crisis etc) IT

WILL ALL MATTER------BUT STILL UNSURE..DECIDE!!!

>

> Also, maybe my question should be determining (and even eventualyrecommending) policy response of government , IMF donors etc to insolvency,

illiquidty crisis (and the decisions made through negotiation or whatever like in

cyprus/greece eg will there be haircut for private investore/bail in/bail out

etc.)...DECIDE!!!. But then again, i need to invest in high yield bonds, not always

countries in direct or terrible crisis...or do i?!!! DECIDE!!. Soverign default!! (by the

way seems like different regions, even countries have different debt structure,

debtors and agreements and economies and evaluation might differ for all e.g.

Japanese local debt vs European debt vs emerging market debt etc (let alone

internal/external and private/public debt), maybe i should focus further...better for

me! Or should i just do a relatively general review of research (exploratory, like


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reading a book on the topic) or critique one article/idea e.g. primary balance and

debt etc, to begin with?!and then go ahead and do something proper article (maybe

even do many smaller articles)!! Hummm....good idea. Decide in the break before

going ahead). Maybe cirtrique IMF, like comparing literature with that...but maybe too

much right now. I am practicing (eventually a review, then can be about countries insolvency and illiquidity and how they are saved or not and the impact on bond

yieldsthe ultimate question i.e. in times of crisis , close to insolvency, illiquidity,

what determines if debtors have to take a haircut or what happens to debtors in such

of different situations e.g. haircut, rollover etc-the ultimate question).... How shoudl ido it? A review looking analytically at the topics and arranging, like a review

We never did that for assignments, we only cirtiqued, but then again, we actually had to, espeiclaly

when looking at theory.

Therefore this could be part of a bgger asignment. It would infact be excllent, followed by a crutiqe of

IMF, or any other model I discover on teh way.

It becomes a literature review...WOW!....UMAIR>>>>>>>Read below, above, see DECIDE!! And

read Draft4 as well..Hey how baout theory and te see existing frameworks (IMF, world bank, moodys)

and comprare and constrats framewrs and theory.

I can even first just look say a critireu of itemepral budget constaint as criteria for sustable debt , it will

be like a 1st

year paper and then icneases it to do what is mentioned.

Right now =For now, compare and critie theory! With main arctile , be careful to dissect your

oprion, main arctile and new artrules. Get them from the greek dbet folder. You can d real

frameworks later (IMF and moodys an all). See text file, more articles

==

INrtoduction;

Since the beginning of the financial crisis, several countries have come close to insolvency and

illiquid. With massive pressures on budgets, due to excessive borrowing in the boom years, many

countries had a difficult time raising finances (REFERENCE)

(it can be due to excessive borrowing, irresponsible borrowing as as well as interconnected,complicated and complex borrowing, REFERENCE)

Situation got veyr uncertain,e speiclaly in Eurooe,l with decisons fof EUropean ekladers and central

banks seeme dto move the market (REFRENCE)

Such situation presented investors with a difficult time, however savvy investors could have seen this

as an opportunity to invest in high yield bonds. However for some countries, the risk seemed to great.

If it woul be found out how likely a country is to actually default.

==== ============ ==============


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START

Q1For time being, I am looking at how to look at debt sustainability

Ultimately, debt sustainability in a crisis (close to insolvency or illieuqd

country)

debt (private/public or external/internal), but i will keep it publicdebt, as it is easy. also because i found more on governmentdebt :) and what kind of economy (emerging, advanced) and at

what stage of debt (good consition, in crisis etc) IT WILL ALLMATTER------BUT STILL UNSURE..DECIDE!!! I think Publicdebt (internal and external, maybe), of advanced economies.>

-Introduction:

http://econweb.umd.edu/~mendoza/pp/w16782.pdf(working paper by IMF staff)

The authors look at whether there is any space for fiscal manoeuvring, what can be called fiscal

space to note whether advanced economies require urgent fiscal adjustments to ensure debt

sustainability.

Due to the depression, the associated bailout, stimulus spending as well as lower revenues, the

countries are now seeing the highest debt/GDP and primary deficit/DP ratios in over 40 years. They

will require more financing in the future, as the it is doubtful whether the PIGS will be able to service

etheir debts. Therefore it is to be seen if fiscal space exists or not.

IMF Working Paper IMF Institute Assessing Fiscal Sustainability: A Cross-Country Comparison

Prepared by Enzo Croce and V. Hugo Juan-Ramnl July 2003

According to literature, fiscal sustainability refers future implications of present policies i.e. whether

a government can continue inline with its budgetary polices without any threat to solvency.

Therefore it is important for policy makers to know if fiscal policy is sustainable in order to

determine weather policy correction is required or not. If the current fiscal policy leads a country

away from solvency, the policy can be said to be unsustainable. Therefore a good basis to assess

sustainability is to determine conditions for solvency are being met
http://econweb.umd.edu/~mendoza/pp/w16782.pdfhttp://econweb.umd.edu/~mendoza/pp/w16782.pdfhttp://econweb.umd.edu/~mendoza/pp/w16782.pdf


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How to Assess Public Debt Sustainability: Empirical Evidence for

the Advanced European Countrieshttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdf

Borrowing is a desirable method to meet expenditures for governments with limited resources.However this only true if it is done with proper fiscal policy in place. Several economists have tried to

investigate the issue of public debt sustainability since the concept of sound fiscal policy was

brought into discussion by J.M. jeynes in 1923.

should this go in sustainability heading?? Public debt sustainability has been studiedextensively since years as misuse of borrowing can have severe consequences. Researchers have

tried to investigate how high debt can rise without reaching fiscal insolvency. Unsustainable fiscal

policies could deteriorate macroeconomic conditions of a country and make it more vulnerable

during exogenous shocks. Huge public stocks and fiscal deficits can be detrimental to the welfare of

a country, as it leads to an inefficient allocation of resources, huge public debt stock piles would

impact future generation and it can also lead to inflation and volatility of inflation.

In fact, any developed countries are now at a critical point in their fiscal policies, such as Greece

which is why ensuring fiscal sustainability is critical. As public debt is expected to rise and might

create concerns that it might reach unsustainable levels, exposing governments to risk of solvency

and sovereign default, authors have address the current fiscal crisis and public debt sustainability

has received a lot of attention. Many studies have been understand to estimate the impact of

financial crisis on fiscal policies and investigate the OECD and EU countries governments reaction to

increasing public debt.

The aim of this paper is to enrich all these studies, by providing an overall analysis

of the evolution of the public debt, among the most developed Debt Sustainability in Emerging

Markets:

A Critical Appraisal-http://www.un.org/esa/desa/papers/2007/wp61_2007.pdf

Many governments (author is discussing emerging markets) are not able to create primary surplussufficient enough to stabilising public debt ratios. Deteriorating global financial condition might

create problems for budgetary rtransger, retaing even bigger challenges for government debt

management, as restructuring debt is usually more difficult for domestic than for external debt.

http://www.tffs.org/pdf/edsg/edsgchap14.pdfseems like a chapter from some book

14. External Debt Sustainability Analysis 1

November 30, 2012

Debt is a natural consequence of economic activity. While some economic entities have more

incomes than their requirements (consumption or investment), others do not. Through debt, both
http://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdfhttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdfhttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdfhttp://www.un.org/esa/desa/papers/2007/wp61_2007.pdfhttp://www.un.org/esa/desa/papers/2007/wp61_2007.pdfhttp://www.un.org/esa/desa/papers/2007/wp61_2007.pdfhttp://www.tffs.org/pdf/edsg/edsgchap14.pdfhttp://www.tffs.org/pdf/edsg/edsgchap14.pdfhttp://www.tffs.org/pdf/edsg/edsgchap14.pdfhttp://www.un.org/esa/desa/papers/2007/wp61_2007.pdfhttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdf


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entities are better able to realize their intertemporal consumption and output preference and

therefore fuel growth.

This debt creation is based on the premise that the debt contract will be adhered to by the debtor.

However, if the debtors income is not sufficient and the assets too are too few to call upon,

problems arise. In such an instance, or even when expecting such an instance, the value of debt

creation coing from internal financial flows, cannot be realised by both the sides, which is why sound

country level risk-managment procedures are necessary and it is important that the external debt is

maintained at a level that is sustainable.

http://www.wiwi.uni-

bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdf

The budget plan is very much effected by growing public debt. If the budget is not balance, deficits

accumulate, creating piling public debts. Several European countries in the last 10 years have

suffered from permanent and in pact high public debts, which has create serious economic and

political problems for the members of EMU as well as to the stability and Growth Pact which has put

in place limitations on fiscal policies.

Due to the difference in sizes of the various countries in the Union, debt is expressed as a ratio of

GDP, which is a measurement used in the convergence criteria of the Masstriccht Treat as well. It

limits the public deficit to just 3% of GDP and public debt at 60%. A figure that in the early part of

2000s was regularly violated by countries such as France, Germany and Portugal.GOES ON TO SAY THAT THE LIETURARE HAS MANY OPTIONS TO

NOTE Sustainability AND WE START WITH BLHA BLAH, GOOD TRANSTION THAT YOU CAN USE

TOO, also see if discussion on sustainability should be put under the sustainability heading or

somehow make a transition to that or what?
http://www.wiwi.uni-bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdfhttp://www.wiwi.uni-bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdfhttp://www.wiwi.uni-bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdfhttp://www.wiwi.uni-bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdfhttp://www.wiwi.uni-bielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdf


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EXCELLENT STRATER ARTCILE---MUST READ

WHOLE!!!!! A MUST (good see abstract from original if

need idea)

http://www.ecb.int/pub/pdf/other/art1_mb201204en

_pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY IN

THE EURO AREA

ABSTRACT parts, already in the introduction were cut out. However conclusion

of the ABSTRACT is kept

ABSTRACTS/CONCLUSION TYPE--Therefore a more comprehensive course/method is needed to

deal with debt sustainability with a more systematic and in depth assessment of country specific

risks to sustainability and requires systematically watching a range of fiscal liability and imbalances

of the private sector. (rather than ad hoc methods to monitor such risks). On top that, importance

needs to be placed on accounting for fiscal and economic behaviour as a response to shocks. The

current financial crisis has also proved that it is important to look at not only medium term risk debt

sustainability, but also account for short term refinancing risks, emphasizing the needs for safety

margins in public finance in normal times as well.

In order to limit the risk of debt sustainability, the Euro Area needs to bring government

debt to GDP ratio below 60%. Already an excellent step towards more strict budgetary

discipline in eth Euro area is the commitment to establish a fiscal pact which has a debt

brake in the Treaty on Stability, Coordination and Government within the Economic and

Monetary Union

1 INTRODUCTION (JOIN WITH ABOVE< WHERE YOU CAN, ABOVE IS ABSTRACT)

Due to the global finance crisis, there has been a very quick build up of government debt in most

euro area countries and therefore for the Euro Area. This shows, among several others things,

decline of economic growth and working of automatic stabilisers, as well as partly sizable fiscal

stimuli and government supporting the banking sector.

This very quick rise in government debt in a sluggish growth, and financially instable environment

calls for the need to asses how sustainable the debt is.
http://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdf


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However according tohttp://www.development-finance.org/en/topics-of-work/debt-strategy-

information/debt-sustainability.htmlwhen no debt relief or accumulating arrears, that debt is

sustainable while

Debt sustainability is an issue of liquefy and insolvency

my point: Some people say illiquid is when cash is the problem and insolvency is when even raising

enough cash becomes difficult. However these concepts seem connected

The author seems to have used debt sustainability and it seems he/she means paying back without

requiring debt reduction or restructuring i.e. is a country illiquid or insolvent?

Sustainable debt argument:(mostly from the main articlehttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf) Once again as discussed above,

the intertemporal budget constraints put very slight restrictions on current account and foreign debt

(in terms of external debt)

http://repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdf

Debt Sustainability Assessment: The IMF Approach and Alternatives

Debt sustainability is an integral part of sound macroeconomic policies, however its precise

definiation is not very clear, and assessing it is even more difficult

This is not unlike other concepts in economics, such as price stability or full employment, however unlike these, debt

sustainability is not even directly measurable.

Every country needs to understand debt sustainability and as there is always a possibility that default will occur,

perverse incentives will emerge.

Private and government (public debt) or state (external debt)(WHICH MEANS EXTERNAL DEBT CAN BE

GOVERMET AND CAN BE IMPORTANT, so you need o JUSTIFY EVEN MORE WHAT KIND OF DEBT YOU WILL

NOTE or WILL YOU NOTE BOTH) borrowers are not entirely in the same situation though. A private default is

sanctioned in line with precise legislation with oversight from courts, however public and external (excluding private

external I guess) default and subsequent litigations and negations that operate i unclear legal rules and uncertain

enforcement mechanisms. This uncertainty regarding public and external debt default is a source of perverse incentives

(used to be known as moral hazard) characterised by the fact that willingness and the ability to pay are two different

things.

As a consequence of these perverse incentives is that several countries cannot access international markets and must

rely on official lending for development. Also, countries tat used to have access to market before default, can access

them once again once an arrangement has been found

Official lenders, the multilateral organization and the Paris club, cannot ignore the issue of debt

sustainability. Their rule of conduct encouraged countries to undertake prudent strategies while

being receptive to development needs. Subjective criterion, that eventually creates controversies.
http://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.htmlhttp://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.htmlhttp://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.htmlhttp://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.htmlhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdfhttp://repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdfhttp://repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.htmlhttp://www.development-finance.org/en/topics-of-work/debt-strategy-information/debt-sustainability.html


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Which is why systematic and universally applicable procedures were designed by the World banks International

development association (IDA) and the IMF have also formalized their debt sustainability assessment (DSA).


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Keynes was the first economist to support this during a time when France ran into recessions. The

idea was that deficits in recessions would be offset by surpluses during expansion and growth will

offset. Permanent recessions should be avoided as no government can with the expectation that its

debt would never be paid back. In the context of keynesia theory, it was believed that debt financing

is necessary to achieve a sufficient level of aggregate demand when private investment is simply not

enough to absorb savings over a comparatively long period of time.

The assumption belongs to Evsey DOar (1944) who attempted to prove that persistent borrowing

would create ever increasing debt, which would require ever increasing taxes to service, eventually

crippling an economy and causing repudiation of the debt i.e. sovereign default. He argued that a

constant overall defect to GDP ratio causes convergence of debt/GDP and interest/GDP to finite

values As a result the taxes needs to service debt, as a percentage of GDP also, reach a finite value

(WHAT DOES FINITE VALUE MEAN?? A LIMITED VALUE????). He contended that the degree of indebt

ness has to converge to a finite value in order to make sure that tax burden doesnt keep on rising,

other economists however (like Buiter, 1985; Blanchard, Chouraqui, Hagemann and Sartor, 1990)

assumed that it must converge to its initial level

maybe this goes into sustainable heading

Buiter (1985) in his paper, A guide to public sector debt and deficits explicitly defined a sustainable

fiscal policy where the public sectors network is kept steady at current levels, as a ratio of its

output.

On the other hand for , Blanchard, together with Chouraqui, Hagemann and Sartor a sustainable

fiscal policy is one where public debt doesnt explode (what does EXPLODE MEAN) and therefore

governments are not forced to increase taxes decrease expenditure, monetize fiscal deficit or

repudiate debt. The limitations was that the present value of future primary surpluses should be

equal the current public debt level. At a given time t the government needs to borrow to finance a

primary deficit (primary expenditures minus revenues), to finance interest payments from previous

year as well as public debt from previous year. This could be presented in a formula.

The equation defines debt accumulation dynamic, where in case of a primary deficit, the stock of

debt rises faster than interest rate, while during a surplus, the stock of debt grows slower than the

interest rate.

make shift definitions and indictaors have been relied upon by authors and researchers, rather than

a clear theoretical benchmark, as there exists none.-->continue in indicators.



need idea)


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_pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY INTHE EURO AREA

By sustainability we mean the governments ability to service all of its

accumulate debt at any specific point in time (PUT IN SUSUTAINABITY). In spite of

the fact that fiscal consolidation in Euro Area was early (in its formation) and comprehensive, risks to

government debt sustainability needs to be closely monitored.

Conventional (standard/usual/prevailing) accounting based, debt sustainability analysis has long

been used to size the risk and monitor debt and has now become an integral part of enhanced

country surveillance in order to asses the size of the risk of unsustainability. . It is a part of EU and

IMF reports on assessing compliance of member nations that have a financial assistance programme.However due to its limitations, the interpretations of final results of the conventional

(standard/usual/prevailing) debt sustainability analysis needs to be careful. The outcomes of such

analysis themselves depends upon the underlying assumptions and analytical tools used and is

therefore prone to significant uncertainty. Care must also be taken as debt sustainability analysis can

directly impact sustainability of government debt , as unfavourable assessments by financial markets

can cause bond yields to rise, increase the cost of government debt refinancing and creating a

downward spiral for sustainability.

THE CONCEPT OF GOVERNMENT DEBT

SUSTAINABILITY

Sustaiablity of government dbet simply means that the accumulated debt has to be serviced at some

point in time and hence it requires a government to be solvent as well as liquid.

Solvency is a medium to long term concept where the governments net preset value budget

constraint needs to be fulfilled, on the condition that the net preset value of the governments

future primary balances must be at atleast as high as net preset valie of the outstanding govermnet

debt . it is the flow concept (maybe desricbed in article as well)

Liquidity however is a short term concept and is regarding governments ability to access financial

markets so that it can service liabilities due in the short term.

(MAIN ARtcile has also discussed this, in fact, so have i)

Therefore it is apparent from that above that even though sustainability assessments need to take

medium to long term view it is also important to take into regard a countrys ability to accessmarkets in short term in order to refinance maturing debt. Otherwise, such a country could face


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debt sustainability issues in the medium term as higher bond yields will increase servicing costs.

Also, government debt can only be considered sustainability if the fiscal policies needs for

sustaibalty are feasible and realistic (or i should write practical), politically as well as economically (A

point the main article also made).

-Factors impacting/ how to determine, which is best and why or not?

MAIN ARTCILE ROUND UP::: omhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf

Sustainable debt argument:(mostly from the main article

http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf) Once again as discussed above,

the intertemporal budget constraints put very slight restrictions on current account and foreign debt

(in terms of external debt)

Concerning foreign debt, Solvency is maintained (not necessarily liquidity) as long as foreign debt

discount value is non zero, that is , it is not due tomorrow. A country can increase its debt

but not more than the increase in real interest on this debt (which, as the author mentioned they

are assuming only interest payments and not principle payments, which can be rescheduled or tat

new debt can be taken on)

This is true even if debt/GDP rises and interest rates rise faster than GDP growth rates. Which

means, no matter how indebted the country gets and how little its ability might be to pay back

it can still be solvent, if the money isnt due tomorrow and interest rates are not rising faster

than debt increase meaning it can still pay interest. (But why even pay interest, cant that be

rescheduled or will it hurt the markets)

it means country is solvent in any case where the infinite sum (sometime in the future, discounted

values)(expenses and income, as discussed earlier) of current account equals the initial debt (i.e.

Present value of net taxes in the future should be large enough to cover initial debt as well as the

present value of government future expenditure. ) . That is the only restriction. Similar restriction on

trade balances, such that infinite future discounted devalue need to equal initial debt. If there are

large deficits and huge debt, future surpluses are required for solvency.
http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf


15/58

Concerning public debt, once again government is solvent as long as government debt discounted

value is non zero that is , it is not due tomorrow. It can increase s long as it doesnt increase faster

than the interest

(which, as the author mentioned they are assuming only interest payments and not principle

payments, which can be rescheduled)

it means country is solvent in any fiscal policy where the infinite sum of fiscal balance equal initial

debt is acceptable (i.e. Present value of surpluses in the future should be large enough to cover

initial debt as well as the present value of future deficits. ) . However the budget constraint once

again puts limits on primary fiscal balance (fiscal balance - debt) discounted flow of future Primary

fiscal balances must equal initial debt and deficits today are to be offset by primary fiscal surplus

tomorrow to remain solvent.(unless of course, you tweak fiscal policy)

by the way, I dont understand why primary fiscal balance, and not fiscal balance.

E.g. looking at net national debt it means that Present value of net taxes in the future should be

large enough to cover initial debt as well as the represent value of government future expenditure.

If government spends more without increasing taxes, it must make it up in the future by an equal

amount in present value or reducing purchase in equal amount in present value.

Therefore it impacts fiscal

policyhttp://books.google.com.pk/books?id=nnebIJ4iglcC&pg=PA145&dq=intemporal+budget+const

raint&hl=en&sa=X&ei=FQvMUNa5K-

eG0AWCzIHACA&ved=0CDIQ6AEwAA#v=onepage&q=intemporal%20budget%20constraint&f=false

. If debt doesnt have to be paid of you simply make zero purchases and service debt through taxes.

As long as debt not due tomorrow and interest payments can be made. (Assuming principle rolled

over and new debt not an issue)

As long as the discounted future inflow-outflow, which can be any time period, is equal to initial

debt. (Or future value of inflow equals future outflow and initial debt)

Which means Therefore the Only constraint on foreign debt and public debt is that they cant

increase faster than interest rates. And the only constraint on current account (BOP) and primary

balance, is that their future discounted value, as we discussed must equal initial debt

(The example in main article and discussed earlier when looking at budget constraint in

http://books.google.com.pk/books?id=nnebIJ4iglcC&pg=PA145&dq=intemporal+budget+constraint

&hl=en&sa=X&ei=FQvMUNa5K-

eG0AWCzIHACA&ved=0CDIQ6AEwAA#v=onepage&q=intemporal%20budget%20constraint&f=false

combined is the same. It is just broken up in the earlier one and a little combined in the main article)

The above is a bare minimum, as it might be assuming that even principal payments can be

rescheduled or that new debt can easily be taken on.


16/58

My note: The thing is, it is difficult to know if a country can pay back in the future (medium/long

term) Later we will see maybe it is better to look at whether a country has enough liquidity/solvency

to cover its immediate/short term needs or will it require change in debt also in terms of Greece, it

snot just government debt its also banking debt or in case of US household debt) always see net

debt, that is debt net of any assets that the government owns, where gross liability should be

liabilities of the sovereign pg4 note)

(I applied concepts to GREECE IN YELLOW, MAYBEI CAN USEIT OVER HERE)

Note: One big flaw. Interest rates I have, are they internal or external debt?? Of course for Greece its

mostly about external, but we require for both. But then again maybe there is no difference

Overall discussion must be around, according to Budget resource constraint:

What did it says about debt/gdp ratio, even if it is rising it doesnt matter. >> At

http://www.tradingeconomics.com/greece/government-debt-to-gdp you can find latest figures but

the thing is that it is rising, and even though it shouldnt matter, it is simply too big and rising too

fast, especial government debt.

Even if interest rates rise faster than GDP growth rates, it doesnt matter>> Interest rates definitely

rising faster than GDP growth. The gap however is too big.

But rise in debt shouldnt exceed rise in interest rates>> Rise in public and external debt is not going

up faster than the rise in interest rates. However the interest rates are rising fast. Too fast.

Future income i.e. primary balance and Current account should equal initial debt ATLEAST (but also

expenses). >>Well, the stock of debt is too high

External debt is 186.440% of GDP i.e. $556.961 Billion and public debt is 170.6% of GDP. i.e.

$507.8478. Can it be paid back???

For external debt, we need current account surpluses sometime in future, but from below tables of

surplus and deficits (which will be discussed later), it seems to be getting bigger and bigger every

year till 2012 and for Public debt we need fiscal discipline and the primary deficit seems to be

shrinking slowing down by 2011 (but so was economy I think) Not sure about future. Greek issue is

governments massive external debt. From tables of trade and current account, we can see tat the

current and primary accounts are both highly defecit redidden.

According to the author http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf)

However these constranst are too loose, something I discussed earlier myself. ONe cant expect to

have massive primary defecits (public debt) or current account (BOP) defecits and expect to make

them up for sometime in the ufture. A goverment cant comitt to such long run coittemnts. EVen if

they can, they might reuqire making in effeicnet ajdustments e.g. in case of public debt riaisng taxes

to ru primary surpluses, which migt actually be too high, or retisrtc spenidng by retsitring supy of

public goods. In case of foriegn debt to make up for current account (BOP) defecits, gvebrmnet

might change exchang rates, dometsi cincome (for tade balance) or increase svaing and cut

inevtsmnets whihc might be too in efeiccte. Therefore it is not actaly feaisble to urn large defeitcs.


17/58

I think and author says. lowrig exngae rate an imprve trade balance, migt hurt extenal debt, but who

knows. or lower invetsment and epxnesidure by gvenrmnet cna impact incoe

and lower trade abalnce, but might impact GDO growth rates etc etc

So what criteria to use if the the above not good enogh for dbet sustaiablity .

Well one can be forthe debt/GDP cannot keep groiwng such taht markets can make it har dto raise

money.

Above miht be trye for greece as there were calls for austerity since years.

(REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things

are ok, and ratios are not ALL THAT BIG, then to some extent

the criteria is not very bad. I mean, debt can be increase to some extent. However the authro

critiques all the criteria in terms of seveirty or a situation if therefore the problem was not thatsevere or that exact situatin didnt exist, perhaps the criteria would work. but then again, why would

we be looking at solvency of a country in that case)

THerefore

CRITERIA 2: for the debt to GDP ratio to be non-increasing

When looking at external debt this means, if debt/gdp is growig, the required difference in trade

balance (I would argue BOP), that would stablised the dbet/GDP ratio that is keep it from growing.Also known as the primart resource gap. Author says bigger the gdp/debt ratio, bigger te surplus

required (I argue NO. Bigger the increase in Dbet/GDP ratio, bigger the resource gap or suplus

required. , why is suplus required. To stop it from growing, you need it to be equal. So its not the

surps required, its the gap between defecits and making he defect 0)) and so will the differnece

between nteres rates and gDp growth rates will be bigger, naturally.

When lookig at public debt, if gdp/ratio increasing, the require primary fiscal suplus hat would need

to stablise. This is primary fiscal gap. biggger reequired surpls, bigger the debt/gdp ratio is ((I argue

NO. Bigger the increase in Dbet/GDP ratio, bigger (primary fiscal gap or) suplus required, but then

again , why is suplus required. To stop it from growing, you need it to be equal. So its not the surps

required, its the gap between defecits and making he defect 0) and s will differnet in inetrest rate

and gdp growth

if debt/gdo ratio is stablised , teh debt is sustaiable ad coutry is solvent/liquid.

Keep in mind, closing this gap can require policies that are just crazy.

(APPLICATION GREECE)


18/58

===========GREEN DEBT APLICATiON=========== Critria 2b:

HOWEVER the author goes on to expand on this criteria and says the time

frame, horizon, under which the gap criteria is seen is important.

in other wor when looking at primary fiscal gap (public debt) or resource gap (external debt) one

should not just look at preset or current levels of real interest rates and GDP growth rates and the

cyclically adjusted (maybe stritcual) values of trade and primary balances

(whatever that means)

Both can be considered in differing circumstances. When solvency is not an immediate problem,

permannet values can eb seen ,e.g. en growth is low.egayve for a year, interest rates aretemprarily

highw and a recession maybe causing tmepraty primary dfecit or trade surpus. (in such a case

permanen. I believe whta this means is that permanenet values will show actualy situation. That is,

can gap be closed in future?

However when solvenyc is an immediate issue the current/cycylical values of itere rates, GDp

growth, trade (BOP) and primary baance must be seen.eg. if structurl fators are causing

low/negatve growth e.g. caused y ovr valued currency (without currenyc rgeime cange), or too much

spenidg the interest rates are very high are it is thoght t be borderline in solvent while there is

primary efetcist due to sturtcrla impedimetsto growth or primary surplus because of tsutcuallydepresed imports..it igt be necessray to look at current gap, as a permanent ga closure cannot be

achieved wiout imedita currenyc regie change or chnage in stck of debt. Exmaple being Argentina,

which had 3 yar negatve growth and a market high intere srate as was considered isolvent. That is

can gap be closed right now?

HOWEVER this is only a benchmark. Looking at the primary and reosuce gap, the criteria of not

growing Debt/GDp ratio isnt a tool to see if a certain stock of dbet is sustainable. It shows that non

increasing debt to GDP ratio (no matter 50% or 150%) is sustainable and the gap mjst be closed,

normative statement. However the gap ight be so big that closing it might be not feasible if initial

debt is too high and debt reduction needed. Given GDP grwth and interest rate values in te long run,

closing te gap might be econocialy and plictall not feasible. Means debt so high and interets in it s

high that decreainsgit becomes an issue. e.g. to acihieve BOP surplus required (or as I said, maybe

not necessailry surpls), gevrmnet and pritae consumton or prvate ivetsmnet might need to be

reduced OR the reuqire primary suplus (or not necssary surplus) severe cut in govenent spenidng or

high in taxes to close the gap and it wont be doable.

SO gap analysis shows what is required , and maybe what time frame to look at , however it doest

directly show that the dbet is sustaiable, as what it ASKS To do, the solutin it shows might not be

possible without debt reduction, reprfling/resurtcutring. COuntry might do so, and stablisze dbet


19/58

(non increasing) in medium term, but costly long term growth , as burden of serving debt dbet would

be so high, that geting debt relief for sustained invetsmnet and long term growth

would be inevitable

(I thinK I argued , it actualy does show a solution

byy showing a bit early, if the SLUTION is feaisble or not and when or if , a debt reflief, reduction etc

wil be required)

THE QUESTION THEN IS, wat is considered a DRACONIAN, that is politicaly, econocally, socially

unfeaisble. It is difficult but one can lcompare present growth rates, inetrets rates and

primary/trade balances with historical averages to get an idea of what is feasible.

gao canot be reduced without severly hampering rgowth in long run (debt overhang)

(inetsment overhang in china http://www.bloomberg.com/video/s-p-s-chan-investment-overhang-a-

risk-for-china-nDKvJYNdR4y0vTT5fQWcgA.html)

THEREFORE the above dsicussin suggests that looking at closng the gap for non incrreasing DBetGDP

ratio is a banchamrk not enough to dretcly note debt sustainability and looking at debt ratios in time

frame.

Apart from that the main thing is to along with noting how big the gap is, it is to be seen how big the

debt is and if it gap could be reduced or not or will debt reduction be required. if gap is too big, it is

also seen how big debt ratios are and seen if they are feailse or not but eg .looking at impact on

growth rates, inetrest rates and teh trade/primary balance, in short/medium/long run in

comparison with their hostircal averages.

EXTREME EXAMPLES OF THE ABOVE SCENRIO::::

THe situaion discussed is a reality in extreme cases, probably cases where imediate rather than

permanent gaps (and other variables, debt/gdp interets rates, growt hrates), have to be seen

Debt Overhang

A situation where there is no incentive to invest and do reforms.

E.g. no incentive to make invetsments, becayse growth will go into serving debt. High forgen debt

therefore will become a self fuliffin prophecy. This can be the case when e.g. a country can stablised

external debt and product larg etrade surplus, ivetsment is lowered to stabilise in short term but

private lowe irnetsmnet, means lower caital of stock and lower outpt and growth.but in medium

term growt is necessray for dbet sevrincg.

THEREFORE counrties that realise this, have little incentve to invest or do reform. The debt is just so

huge. Debt reduction, will becom enecssary here.

THis may even cause a trap. That is when debt is so high and servicng it inhibits growth so much

(maybe through sevcing. or reudcing gap) that even creditors would benefit from reduction. IN sucha case delaying releif can increase the problem. A leffer curve migt eve exist accrnd to ~(1995) where


20/58


21/58

For external people suggest external debt to GDP, external debt to Eports, debt service to GDP, debt

service to exports. Market price (discussed later) of debt can also give an idea of how themarket

prviecies the likelihood of the country being able to service thd ebt in time and in full

For public debt, author susggest public debt to GDP, public dbet to government revenues, debt

service to GDP, Debt service to government revenues.

All have procs and cons. Assesing solvency is an art and looks at a broagd range of factors, indictars

as well as forecasts about likely future policy events and shocks in the country.

(YELLOW APPLICATION T O GREECE NOT DONE)

CRITERIA3b (carrying forward from all the above): Historical averages of

the ratios compared to wat is due and if gap ca be closed.(But how to continue? Well, the IMF thing complements criteria 3a, look at its details and all and put

it there.

For the rest, just start findg more stff and adding it e.f. what si fiscal gap?? or gvernet budet etc on

wiki add it here.)

As discussed earlier, closing the gap might not be feasible, but what is not feaisble.

we said what is a severe or draconian difficulties i.e. politically, socially and eocnocclaly feasible. It is

difficult but one can lcompare present growth rates, inetrets rates and primary/trade balances with

historical averages to get an idea of what is feasible.

To see wheater dbet paths are sustaible, and debt stablty can be acived through clsing gaps, in a

sesible scanrio one can asses meidun term prospects . To make this assesment we can look at avrga

veluaes of ariables such as GBP growt rate, trade and curnet accnt balance, discal defeucts inetresr

rates, non debt creaing capital infolows e.g. FDI) which can help us not what resources are vaialbe

to service debt (considering te principal is roled over) (and i think it can show even if a pricple can

be paid or not)....that is if a country is solvent or liquid, And it can also help us note whether

resource/primary gaps can be closed under the resaoley assumed values of the variables just

discussed i.e. if debt stability could be achieved or not.

Its like cash flows. Expected resouecs are compared to medium term due interest payments (time

horizon defined). As I understand, assmuning principal is bring rolled over, and reprofiled, and the

debt cant e serviced i.e. inetrets cant be paid, its a solvency issue. (and if means, if princpal cant be

paid, but interest can, its a liqidity issue (less severe)as we can get reprofiled, reshudled, its a

liquidity issue)

Simialry, if under the expecte values of the variables, the gap , historical value of primary fiscal

balance, trade balance, growth and real ietrest rates suggest that closing the primary or resoue gap

for debt stability o sot feiablse under reliastic conditions ad scaneros about macro variables, then


22/58


23/58

(YELLOW APPLICATION TO GREECE)

CRITERIA3c(carrying forward from all the above):-Using Maret value of

debt to note ustsainablity ie (using market vakue of debt and seeing

cashdlows)

Although dbet reprofiling can redice short term costs it might sverley increase medum term costs, as

it did for Argentina in 2001 Therefore to note sustaialyt, it is important to note tat debt burden is

sustaiable.

one way is to look at disoucted cash flows for dbet svrincg (amortizatin of princiapl and interest).

(Casf flow disussed earlier, when disucssing that if hostorical inflows are noted it can be seen if debtcan be seviced

and gaps can be closed)

But wat disoucnt factor to use? If current market rates/spreads are used we get cirrent value of

debt. but if country is possile insolvent and may default this will give current low vaue of debt. The

uathor rgues however, that if the price has coorected priced the risk of default then this is the

correct value of dbet and hence a measure of how mch debt reduction is reuqired to achieve debt

sustainatlity. (but how can old debt, be priced by todays market price??...maybe it can)

The market price (which I believe is used for disocunted cashflows) can be mispriced due to panic,

where spreads are unreasonbly high compare dto fundamnetsl or where returcting is immeinet and

debtors are trying to reduc ethe makret value of debt to get a better deal.

In any case

if market vaue of debt is VERY different from value of prospective cashflows payments discounted

by a risk-neutral discount (why discounted?) rate, a

debt reduction maybe be justified.

(YWLOW APLICTAION TO GREECE)

{{{{{{{{{{{{{{{{{{{{{{{{{Applied to Ecudaor

Application to Ecuador:

Ecudaor in 1999 accoridn to aboe criteria, the medium sustainability of debt was higly unlikely and it

seemed the country was insolvent.

*40% of budget was going to sevice dbet

*Buffeted over and over by negative shocks to its main export commmities

*In 1999 banking system was in shambles and was bailed out, frther putting pressure on publicsector. It cost 15-20% of GDP


24/58

*Debt/GDP, Debt to export and debt to govberment revue ratios all were extremely high (more than

100% for debt/GDP). Higher than emerging market average and cloe or above HIPC ratios (heavily

indebted poor countries)

*The aount if primary and trade balance adjsment necessary ro stabluze the dbet ratios (close the

gap), based on the historicl averages of GDP growth real interest rate and primary and trade

balances, was not feasible without dbet reudtion in govenrmnet and external debt.

*Debt reflief through Brady programme in 1990s was very modest and not reduce debt burden

much and debt indivdtars actually worsend over time.

Rather than being illiquid, (that is a rollover or i think reprofiling and not debt reduction) the broad

indictoars showed it was insolvent. External debt was unsustaibable and debt reduction was

justifedto restore medium term debt profile.

I think Greece was in a similar position but maybe not as bad as Argentina.

DO FOR GREECE }}}}}}}}}}}}}}}}}}}}}}}}

debt reduction was reuqired to restore medium term sustaiality of debt profile

{{{{{{{{{{{{{{{{{{{{{{{{{Applied to Ecudaor

Application to Ecuador:

Ecudaor in 1999 accoridn to aboe criteria, the medium sustainability of debt was higly unlikely and it

seemed the country was insolvent.

*40% of budget was going to sevice dbet

*Buffeted over and over by negative shocks to its main export commmities

*In 1999 banking system was in shambles and was bailed out, frther putting pressure on public

sector. It cost 15-20% of GDP

*Debt/GDP, Debt to export and debt to govberment revue ratios all were extremely high (more than100% for debt/GDP). Higher than emerging market average and cloe or above HIPC ratios (heavily

indebted poor countries)

*The aount if primary and trade balance adjsment necessary ro stabluze the dbet ratios (close the

gap), based on the historicl averages of GDP growth real interest rate and primary and trade

balances, was not feasible without dbet reudtion in govenrmnet and external debt.

*Debt reflief through Brady programme in 1990s was very modest and not reduce debt burden

much and debt indivdtars actually worsend over time.

Rather than being illiquid, (that is a rollover or i think reprofiling and not debt reduction) the broad

indictoars showed it was insolvent. External debt was unsustaibable and debt reduction was

justifedto restore medium term debt profile.


25/58

I think Greece was in a similar position but maybe not as bad as Argentina.

DO FOR GREECE }}}}}}}}}}}}}}}}}}}}}}}}

debt reduction was reuqired to restore medium term sustaiality of debt profile

CRITERIA OR NOT(carrying forward from all the above):??????WHAT DEBT

RATIO IS BEST???

arguments below and strange exmaples which might not be necssary

Severl aindictars of external and discal debt sustaiablity exist to asses solvency.

THree most common are debt/GDP , debt/export and debt/gov revenues ratios. Look at which is

approprte is necssra to asses debt sustalbity.

Criticam of debt/GDP ratio> difficult to see which is better.

While argentina debt/ratio at 50% looks like any latin country debt/export ratio at 400% is to high.

Looks solvent with one inslvent wth another.

{{{{{{{Howeve in case of argentina is said that the currency is overvalued. To restor rgowth, currency

will aprreciate, exports will fall and thediffernet between both ratios wil be lower, as exports

increase and debt falls. (is this only for extenral dbet...or I believ, value of inetrnal debt woudl fall

as well, well, depending on when it was issued). later in artcle it says thta proetcinsim or ovevruae

ducrneyc is keeping exports low}}}}

Criticism of dbet to export> It is necssray for extenral debt, as hard cucrney ccomes rom exports (or

BOP). BUt its not exports, it trade surplus (import-export) (i would say BOP surplus), oterwise

unsustaiable external dbet. ALso, some counrteis are syrtctualy such taht debt/export ratio remains

low and therefore debt/gdp maybe more approoiet.

{{{{{{{{{{{{{{{{As an example, two coutry trading with eachother and the world, as seprate and

combined, there debt to GDP ratio stays same and they lok solvent in each case, but when

combined their debt t export ratio doubles and the ratio take it s fro solvent to insolvent therefore


26/58

the author concludes that debt t GDO ratio maybe be faulty as Larger ounrties with great intra-

regional trade rather than international trade, can seem insolvent while saller courties

with similar fundamental would look solvent just because their export to GDP

is higher. }}}}}}}}}}}}}}}}}}}}}}}}}}}

In which case Debt to GDP ratio just MAY be a better measure of solvency.

Then again, debt to export cannot be disregarded, as debt/export ratios can tell some interesting

thinsg about countries and their abiliy to pay back.

The two country exmaple, of high intra regional and low internation trade, making it a large closed

country, where debt/export is naturally high.

However a argentiina shoud naturaaly be a small, open, interntainaly trading country like argentiina

should have high export ratios (export/gdp etc). (WHAT ABOUT GREECE) HOwever as it is low, it migt

show that the currency is overvalued, protetcionsism or retsitricve policies hinder export rathe rthan

structural factors.

>>>Botton line is that Such counrties, with high debts and low openness (low export/GDP) might not

be able to service debt and even considerble reudtci in vaue of currneyc cannot change the trade

balance to an extent taht resource gap culd be closed and debt sustaibliyt (therefore solvency) could

be ahciveed/ Therefore present export ratios (meaure of openenss)_ can influence how ikely a

ocutry can sevice dbet (and what needs to be done). (Altg I think rgnetna, with an extreme 400%

debt/export ratio is an unfairly extreme example to make this point. Its a point that canbe made wit

any EXTREME ratio.

Reated to the above is

Crticism of Debt to GDP and Debt to gvermnet revenues.>>>

debt/gdp vs debt/revenues---If most of teh extenral dbet is of the soverign, or when one is looking at

domestic public debt , then debt must be compared to some fiscal vairable.

Also, if government rveue is small compared to GDP and is structuraly unable to raise revenue out of

GDP, then GDP is not a good measure, and gvermnet rveenues are a better scale.

(His arguments are based on situatin and exmaples)

But it can be argued absolute gievrmnet revneus are not an appripare scale, rather the ability to

achieve primary surplus (reenue - non interest spenidng) (althogh i would argue, not the bailty, but

the actual primary surplus...well, actualy it is the abilty because there not always surplus)..(simmilar

argument had been used earlier where debt to export was not good, but actually trade surplus is ....

and as can be seen, it is stll beni assumed thatti stablised debt, the dbet/gdp ration eeds to be non

increasing and lcosing the gap)

debt/givenment-- HOwveer If rveneues are a large percnetag eof GDP, primary adustmengs can be

made eailsy to achivee debt sustaiality, therefore ths ratio cnanot be ignored either.

Therefore the author suggests that all the abve have pros and cons (more suitable in differentcoditios) and all may be useful in making an ssesment, however once again I think a coutrys history,


27/58

historical averages of ratio, its strutucla make up govebrmnet aims, relations, requirements, debt

sevrincg reuqirments, compairosn to similar countries in size or development or structyre etc, shoud

all be known

[[Note toself:I think the author I think in any case combined the ratios with'gap nalaysis, histricla

avreages'

etc e.g. to see how likely gap clsing was, through historical aveges of variables.]]

IGORNED A RECAP THERE.

{{{{{{{Application of debt ratios to Argentina


28/58

if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria

would work. but then again, why would we be looking

at solvency of a country in that case)

CRITERIA 4 (Related t market value discussed in Criteri 3c)

INterest rate impact n debt, det dynamic and slvney:: (higher market price leads solvnet to insovncy,

as debt becomes, exensve, more diffiduclt and more needed)

IMpact of interest on debt dynamic is imprtant to consider.

If debt gets too high, the market can price it higher , such that it cant be serviced on time. Whihc is

when the sreads show likely hood of partial default i.e. when debts cant be fully sevicedon time.(why not full default??, becuase these things happen in a sequece?) Cetrus peribus, risk ajusted

interest rate will make a cutrys given stock of debt accumlate (I THINK it means as probaly higher

interest rates mean, even biger loans are needed , more often) In such a hgh interest envirnment,

even if a coutry/goenrmnet is foowing sound policies, tryin to avoid default will make the debt ratios

go higher. A coutry might eb victuim of self fulfiling solvency trap , where invetsors themsleves

assemntdefault to be more likely, trgger interest rates that otherwise migt be low, to become high

(high er sujectie rathe trhna lowe orbjective probbality). Even if high inetrets was not justfied, the

cuntry might be forced to default, in euqibalirim. Even if tey dont default, cost of borinwg can becoe

prohibiivtely high. Therefore one can have severl eqabiriam where any subjetcive probality of

default beccomes self justfied, altough fundmetasl might not sya so.

The higher probabli leads to hher sovergn spreads, which in turn forces the borrinwg to default to

justfy having comiitted to such high interest rate. suc Perverse dynamics an issue for oduntries

betwen iliqudity an dinsolvenyc. When iliequid, markets are uncertain about probality of default,

any increase in obetcve problaity means the market, whihc includes risk avere inevtsors, to react by

spreads increainsg of ocurty/gvj and worseing their debt dynaics, thus solvent agent becomig

insolvent.

Inhigh interest situations.Although if eveyrone pays on time woudl be socially efficnet, high interst

on insovent cunrtries represnte objetcve probaly of default. In equailibirm, insolvent counrties/gvs

will default such that net of defualt return will on averge be clse or equal to a safe asset like US

traseruies It doesnt make sens eo belvee that everyone in high inetrest can pay in full , on time,

everytime for eveyrbod. otherwise after default the real cost of borrinwg would be too high and

prices would be mis priced e.g. if russia paid i full GKOs of 70% the real borwwing costs would have

ben proibitive. The agurments says that the inetrest above riskles rate should default in propoertion

to spread.

Cuntries shoudnt be allowed to default lie that, if debt relief was easy, there is incentive not to payi.e. debtor moral hazard. HOWEVER high interest the uathr says does refelct (espeialy in


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docuntres/gov in diffiuclty) that they wont be paid bac in full. If makrte prices the high risk correctly

then in euqlairim, defaulst will occur from time to time. Some countries/gv that brromwg before

dfeaulting at high spreads, migt be able to service teir dbet given the changes in their eoncie and

the realization of the shck, while for others it wil creta enegtaive dveekoments and shocks that

insolency will occue

BOTTOMLINE (from the Main article):::::from the above discussion we can see:when close to uncertainty and insolvency A country might be trapped in a self fulfilling prophecy, i.e.

if defulat is expected, the spreads could rise and turn it into an actual default. If its only a illiquidity

or semi liquidity issue (mexico 94, korea 1997) we have other (better) options rather than debt

reduction or sovereign debt restructuring mechanism( i.e. specifically, official exceptional financing

may be warranted or debt could and should be rolled over (if collective action problems can be

solved) outside a SDRM)

Also, if a country is insolvent, the spreads might still widen beyond what is justified by fundamentals.

in such a case if debt is restructured so that the coupons on instruments are reduced. This is not

really a haircut (NPV reduction) as only the component of the instruments that represent the 'bad

equilibrium ' element of the market spreads (that have become too high), needs to be reduced so ,

enabling debt sustainability and helping avoid a trap. Also reducing coupons will not represent a loss

for investors as the rise in market value will make up for this as the coupons were reduced only

considering only the bad element of the self fulfilling spread, therefore making debt sustainable

and giving it higher value. (e.g .Argentina high spread right now because of actual risk of default,

insolvency and inability to pay, but even ten it is possible that there is a bad

element of self fulfilling default that is a component of the high and volatile spreads. restructuring toreduce coupon for only the self fulfilling bad component, will

make debt sustainable)

(initially i thought this meant bad bond, but no it meant the price risen due to market panic or

subjective probably of default , that is not fundamental)

(REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things

are ok, and ratios are not ALL THAT BIG, then to some extent

the criteria is not very bad. I mean, debt can be increase to some extent. However the authro

critiques all the criteria in terms of seveirty or a situaion

if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria

would work. but then again, why would we be looking

at solvency of a country in that case)


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need idea)http://www.ecb.int/pub/pdf/other/art1_mb201204en

_pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY INTHE EURO AREA

3 CONVENTIONAL DEBT SUSTAINABILITYANALYSIS

Te section looks what the actual concept of government debt sustainability is (which will go in the

above section), and then goes on to look at the theoretical foundations of conventional debt

sustainability analysis. It then goes on to give projections for euro areas aggregate debt

development in the medium term. The emphasis is on the fact that conventional debt sustainability

analysis is subject to a trade off between theoretical integrity and simplicity.

Conventional debt sustainability analysis:

Is an accounting practice based on the standard debt accumulation equation (referenced in the

paper), according to which the change in debt to GDP ratio (bt )

is derived from accumulated effect of three constituents, namely:

a- The interest-growth differential (which i believe means the difference between the GDP growth

rate and the interest on the debt). It shows the impact of the debt ratio increasing the real

interest rate as well as the debt ratio decreasing real GDP growth rate (again formula

referenced in article)re read in article, i think they mean to say it shows the impact of the

rising debt ratio increasing the real interest rate as well as the rising debt ratio decreasing real

GDP growth rate

b- The primary balance (pbt) which I believe here means the primary fiscal balance (government

expenditures and revenues, less interest)

c- deficit-debt adjustment (ddat)

that part of the change in debt to GDP which is not reflected in the deficit of a country (WHAT!!!!). It

is derived from such things as i-a change in the size of foreign currency denominated debt related to


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a change in exchange rate, ii-financial transactions made as a result of government support to

financial institutions iii receipts (income or inflows) from privatisation or iv purchase of new assets.

It is generally based on the gross general government debt and not on the net debt concept which

nets the governments financial assets (WHAT!!). This is because, the definition of financial, as

compared to non financial assets is different among countries and therefore makes comparison

difficult. Also, this is because net assets are not always easy to liquidate. In any case, financial assets

do represent an important cushion for EU government in order to address debt sustainability, where

financial assets represent about a 1/3rd

of the value of government liabilities. This is also the case for

government holdings in state or party state owned companies, where receipts from reducing

ownership can help reduce public debt. However, in spite of this, such sale receipts in countrys that

are facing liquidity shocks may only be able to created limited revenue in an already weak economic

environment, if it is possible at all. Therefore even though non financial assets effect the size of the

net debt and are appropriate to assess long term debt sustainability, a more sound definition of debt

should only include financial assets that can be liquidated (and hence support debt sustainability) atshort notice (when it is actually required).

If it is assumed that deficit-debt adjustment (ddat) is zero i.e. ( which means there is no part of the

changing debt to GDP ratio that is not reflected in the deficit) and the interest-growth differential is

positive, real (or not net) interest rising faster than real (or not real) GDP growth) therefore debt is

increasing, two conclusions can be made from the debt accumulation equation i.e. in order to

stabilise or reduce debt to GDP ratio, appropriately large primary surpluses will also be required and

the second conclusion is that countries with high debts need larger primary surpluses to stablise or

reduce debt to GDP , as compared to countries with lower debts.


_pp55-69en.pdf
http://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdfhttp://www.ecb.int/pub/pdf/other/art1_mb201204en_pp55-69en.pdf


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In the case of positive deficit-debt adjustments (change in debt to GDP not reflected in deficit,

positive here would mean taking up debt that is not shown in debt to GDP I guess), as seen during

the financial crisis due to government support to the banking sector, primary balance adjustments

needed to stabilise or reduce debt to GDP would have to be even higher.

The above chart 3a shows aggregate debts for the Euro area for 2010-2020, under a baseline and

consolidation scenario (whatever that is). The scenarios of aggregation of dynamics of all Euro Area

countries is based on the ECs 2011 autumn forecast upto 2013.

After this period (2013) the real interest rate, growth and primary balance assumptions of the

scenarios are based on

-Real GDP is based on potential growth after 2013 assuming that slowly the output gap will be closed

(output gap?? Is it primary gap?? In any case is referenced to another paper)

-The average effective real interest rate is assumed to slowly converge to 3% for all the Euro Areacountries. Real interest being defined as an average effective interest rate that reflects a projection

of interest rates at varying maturities and maturity structure of government debt. IN general, the

impact of market interest rates on debt sustainability analysis results depends on quickly they effect

refinancing needs of a government (something like this discussed earlier in the paper)

-As for primary balance (pbt) the structural component is assumed to be unchanged until 2013.

From 2014 the headline primary balance improves with the lower cyclical deficit component, while

the structural balance remains constant.


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Deficit-debt adjustment (ddat) is assumed to be zero onwards from 2014. In order to assess how

sensitive the results are to shocks, a bound test is conducted: in the consolidation scenario, where a

mechanical adjustment in the structural primary balance of 0.75 percent points is assumed (in

contrast to keeping the structural primary balance constant as was the as en baseline scenario) until

a balanced budget (in structural terms) is realized.

Looking at the chart, it can be seen that under the baseline scenario, the debt to GDP ratio is to level

off in 2013 after which it decreases very slightly, after which it rises again at the end of the period

under study. However under the consolidation scenario the debt to GDP ratio there is a stronger

downward trend after 2013. In a scenario with slower or lower growth and/or higher interest rates

than in the Vaseline scenario the GDP to Debt ratio would be on an unsustainable route.

However it is important to stress, that the results are only an illustration of the Euro Area and are

based on ad hoc assumption of medium term developments of interest growth differentials and

primary balances and only reflect the aggregate sustainability risk for the Euro Area countries.Therefore the results have little meaning for policy consideration.

Another important point is that aggregate sustainability does not imply government debt

sustainability at country level. This is important as sustainability in one country impacts others and

create a wider contagion, eventually creating financial stability and fiscal sustainability risks for the

Euro Area as a whole (but if aggregate is fine, why would it create risk?? Or perhaps country level

can just show origin of a problem?? Which would eventually show up in aggregate risks as wellI

think.will it show up eventually in aggregate results?).

This reflects the institutional framework of the Euro area, where fiscal policies are still to a large

extent a national consideration which is why according to the author, it is the duty of each member

country to pursue sound public finances and contribute to stability and smooth function of the

EMU.

CONTINUE FOM HERE, MUST READ as a STARTER

ARTCILE- A MUST TO READALLL, DONT GO AHEAD

WITHOUT READING ALL pg62>>

Fiscal space: (only looking at advanced economies and ONLY PUBLIC DEBT)

http://econweb.umd.edu/~mendoza/pp/w16782.pdf(working paper by IMF)


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actually sumari paragraphs in ones and quickly deal with this, but only

those parts that I covered below. Get to the point and thats it

The authors look at whether there is any space for fiscal manoeuvring, what can be called fiscal

space to note whether advanced economies require urgent fiscal adjustments to ensure debt

sustainability.


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certain Debt/GDP ratio should be aimed at.main article agrees

http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf

(I think it requires the ) If the primary balance is always remains a specific, constant , proportion of

the lagged debt, then a sufficient condition for this strict definition is that the responsiveness of the

primary balance must be greater than the interest rate-growth differential, i.e primary balance mustrise faster than interest rate growth. However once the possibility of fiscal fatigue, where primary

balance responds eventually slowly to rising debt than the interest rate-growth differential there will

be a finite debt limit. (primary balance cannot keep up with rising interest rates).

This is supported by their study of 23 economies between 1970-2007, show that there exists a non

linear relationship between primary balance and lagged debt, thereby showing characteristics of

fiscal fatigue i.e. primary balance rises slower than rising interest. (I think, check). When debt is

small, there is no relation or a very small negative one, but as debt rises, so does primary balance,(which is great), however its responsiveness to growing interest decreases and ultimately becomes

negative when debt becomes very high. The relationship remains even when several conditioning

factors are considered and a variety of estimation techniques are used.

The author did this by empirical estimates of the reaction function of primary balance with the

actual interest rates or endogenous interest rates derived from the model and therefore determine

a countrys debt limit as well as the available fiscal space (fiscal adjustments or manoeuvring that

can be made). The results show that Greece, Italy, Japan and Portugal have the least fiscal space

(manoeuvring capability) while Iceland , Ireland , Spain and UK and UK are also constrained. On the

other hand (in contrast the author uses) Australia, South Korea, New Zealand and Nordic countrieshave the most fiscal space to deal with unexpected shocks (what shocks?? Such as revision on

data??)

The authors make three contributions:

The author has given a defifination of debt limit

(--autheir says debt limit is beyod which debt cannot eb rolled over. debt limit beyond which fiscal

solvency is in doubt. E.g. market price rises so much in anticipation of default, interest premiums

rise so much that it in itself increases probably of default with no solution at finite interest rates. We

then define fiscal space as the distance between the current debt level and this debt limit. defined

as the difference

between projected debt ratios and debt limits, or diferentce between current debt level and debt

limit. Do countries have room for manucrvblity? [which it seems gives them manuvriblity] that has

the reasonable properties of increasing in the countrys average fiscal effort and decreasing in the

interest rate-growth rate differential.
http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdfhttp://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf


36/58

Secondly, The model they use shows how government can suddenly loose financing access any

changes in market sentiment about possible shocks (that might not occur) can lead unsustainable

debt dynamics.

Thirdly, empirical estimates of fiscal space available to advanced economies is given and they

contend that their approach quantifies the extent to which policy and institutional changes cansupport in increasing the space that is available (my note: if it is quantifiable, then obviously it show

the extent to which policy can impact it).

The section II of this paper develops a theoretical framework and ultimately derives the debt limit.

While section III presents estimation results for the fiscal reaction function and reports the

estimates of the fiscal estimates available for the sampled countries.

-Really< i am lost after this, do I need the rest?! Maybe actually quck one liners

Theoretical framework (basis) for the model

1-Soveirgne creditors and debtors:

FORUMLA

Looking at the credit relationship between a sovereign borrower and numerous small creditors .

Looking at the standard budget constraint formula. The interest rate is set exogenously (probably by

the market) and is equal or greater than the endogenous risk free interest rate (in equilibrium, theinterest rate will be an increasing function of the probability of default, as shown below)


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Assumption2: Government defaults only if debt goes beyond debt limits

This debt limits is defined as when at a finite interest rate (does it mean given that there is a

finite/limited interest rate or that there is only one interest rate???), the maximum a governmentsmaturing debt that can be rolled over and finance primary deficit. After which roll over is not

possible

FORUMLA

Assumption3: Creditors are risk neutral (neither risk averse, nor risk seeking)

Creditors are small, numerous and risk neutral who lend to a sovereign assuming

(i)I The probability of the government debt/GDP going on an explosive path is less than unit

probability (i think it means 100%) . By explosive it means increasing without limit regardless ofprimary balance shocks in the future. (what shocks, such as revision data?? But what else, sudden

movements??)

And

(ii)That there is a finite interest rate (again, does it mean given that there is a finite/limited interest

rate or that there is only one interest rate???), [does it mean 1 single interest] which compensates

for the endogenous risk of default being taken up by the risk neutral creditors.

FORUMLA

The arbitrage implies that as long as probability of default is more than 1 and less than unity (which i

think means 100%), the default risk premium is positive, increasing convex function of the

probability of default.

(iii) If there are multiple interest rates that satisfy the above arbitrage condition, then creditors are

assumed to choose the lowest such interest rate.

2.2-Rationale expectations equilibrium and Debt limit

The rationale expectations equilibrium of this model needs to be established. This is define as the

sequences of different interest rates and public debt at which the governmental is able to satisfy

the budget constraint , its reaction function (reaction of primary balance to debt I guess, written in

the formula above function formula above) and the default rule (whats that???), while creditors are

satisfying the condition of arbitrage.

The authors then aim to analyse and establish the debt limit that is the maximum debt at which the

government is able to borrow at a finite interest rate (once again, does it mean given that there is a

finite/limited interest rate or that there is only one interest rate???). For this the author

characterises the models equilibrium default probability and establish well defined limits within


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which the debt limit is determined. Appendix I provides a full derivation of the debt limit and its

properties

looking at the models equilibrium default probability , the probability of the soverign defaulting innext period is the probability of the debt increasing more than the debt limit. FORMULA

and therefore the creditors arbitra

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