Since the Global Crisis, sovereign debt levels have exploded in many OECD countries. This column presents a new measure of government debt – maximum sustainable debt. This measure takes account of the fact that a shortfall in growth naturally increases the probability of default, while allowing for the possibility of rollover. Applications to recent data suggest that without sufficient institutional constraints, governments will generally borrow up to a level close to the maximum that can be sustained.
Fabrice Collard, Habib Michel, Jean-Charles Rochet, 13 July 2016
Jasper Lukkezen, 24 September 2015
After 2018, Greece should have market access. This column argues that without further debt relief, this is unlikely to happen. Under reasonable assumptions, its debt ratio will likely not decline, and the financing burden will increase again. Private investors will take these risks into account and will ask for a risk premium that Greece cannot afford in the long run.
Andrea Consiglio, Stavros Zenios, 12 August 2015
Some experts view Greek debt as sustainable, while others claim it is not sustainable. This column argues that the distinction between tactical and strategic debt sustainability can explain this difference of opinions. Moreover, strategic debt sustainability analysis should account for tail risk. This approach shows that Greek debt is highly unsustainable, but sustainability can be restored with a nominal haircut of 50%, interest rate concessions of 70%, or a rescheduling of debt to a weighted average maturity of 20 years. Greece and its creditors should ‘bet on the future’ and embrace debt relief.
Nauro Campos, Fabrizio Coricelli, 17 July 2015
Greece’s reluctance to implement ‘the structural reforms required for debt sustainability’ is a recurrent theme in the debate on the EZ Crisis. This column qualifies this conventional wisdom by reassessing the relationship between Greece and the EU over the past four decades. Although Greece has implemented structural reforms that were substantial enough to bring about a turning point in its relationship with the EU, these reforms have been overly localised, badly sequenced and implemented by short-sighted political elites. The role that structural reforms can play in solving the current crisis should not be overestimated.
Jonathan Ostry, Atish Ghosh, Raphael Espinoza, 22 June 2015
High public debt ratios dominate today's fiscal policy discussions. This column argues that paying down the debt involves a trade-off that balances the gains from the insurance value of low debt against the costs of an insurance premium – higher distortionary taxation. When countries have fiscal space and no real prospect of a sovereign crisis, the cost of bringing down the debt is likely to exceed the crisis-insurance benefit. The best policy might be to simply live with higher debt.
Tamon Asonuma, Said Bakhache, Heiko Hesse, 05 April 2015
The interest in the implications of sovereign debt home bias on debt sustainability has been growing. This column presents new evidence on this issue using a sample of advanced and emerging markets. Home bias generally reduces the cost of borrowing for both advanced and emerging markets when debt levels are moderate to high. A worsening of market sentiments diminishes the favourable impact of home bias on the cost of borrowing, particularly for emerging markets. In addition, higher home bias is associated with higher debt levels, and with less responsive fiscal policy.
Lars Feld, Christoph Schmidt, Isabel Schnabel, Benjamin Weigert, Volker Wieland, 20 February 2015
Claims that ‘austerity has failed’ are popular, especially in the Anglo-Saxon world. This column argues that this narrative is factually wrong and ignores the reasons underlying the Greek crisis. The worst move for Greece would be to return to its old ways. Greece needs to realise that things could actually become much worse than they are now, particularly if membership in the Eurozone cannot be assured. Instead of looking back, Greece needs to continue building a functioning state and a functioning market economy.
Julio Escolano, Laura Jaramillo, Carlos Mulas-Granados, Gilbert Terrier, 27 February 2015
Fiscal consolidation is back at the top of the policy agenda. This column provides historical context by examining 91 episodes of fiscal consolidation in advanced and developing economies between 1945 and 2012. By focusing on cases in which the adjustment was necessary and desired in order to stabilise the debt-to-GDP ratio, the authors find larger average fiscal adjustments than previous studies. Most consolidation episodes resulted in stabilisation of the debt-to-GDP ratio, but at a new, higher level.
Francesco Giavazzi, Guido Tabellini, 17 January 2015
The ECB may soon launch QE. Two of Europe’s leading macroeconomists argue that QE is the ECB’s last anti-deflation tool – it must not be sacrificed to political expediency. The risk-sharing debate is secondary to the programme’s size and duration – one example would be €60 billion per month for one year, or until inflation expectations rose to near 2%. The ECB should also explain that no matter how well the monetary part of the programme is designed, an accompanying fiscal expansion is critical to QE’s effectiveness.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Paolo Manasse, 01 December 2014
Today’s Eurozone fiscal discipline is the amalgamation of reforms implemented over ten years, with the latest and largest changes agreed in crisis settings. This column argues that the result fosters neither growth nor stability since actual fiscal policy has been powerfully procyclical. The focus on intermediate targets has distracted attention from the final objectives – debt sustainability and economic convergence. A drastic simplification of the current rules is proposed.
S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy, Malin Hu, 27 October 2014
There has been renewed interest in sovereign debt since the Global Crisis, but relatively little attention has been paid to its composition. Sovereign debt can differ in terms of the currency it is denominated in, its maturity, its marketability, and who holds it – and these characteristics matter for debt sustainability. This column presents evidence from a new dataset on the composition of sovereign debt over the past century in 13 advanced economies.
Giuseppe Bertola, 04 October 2010
How does accumulation of public debt affect the menu of labor market policies available to policymakers? Discussion Paper 8037 finds a strong association between debt stock and debt service indicators and employment and unemployment rates between 1980 and 2000. The author suggests that debt service obligations will have important implications for future labour market interventions.