Country Risk: Fiscal Policy and Public Debt

Antoine D.

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Country Risk: Fiscal Policy and Public Debt

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Country risk, fiscal policy, public debt, seignorage, economic development, economic growth, allocation of resources, distribution of income, spending, taxation, finance, GDP Gross Domestic Product, sovereign risk, Ricardian equivalence, government debt, budget deficit, monetary policy, debt indicator, willingness to pay, serial defaults, national defense, low crime, income distribution, economic stability, economy, debt, debt dynamics, debt ratios

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Governments refer to (elected) people who form the administrative body of a country. They are important because they take into account externalities and finance public goods (which the private sector would not want/manage to finance). Their objectives are : education, national defense, low crime, income distribution, economic stability, etc. Fiscal policy to achieve these objectives has two main instruments, which are spending and taxation. Using fiscal policy, governments can influence economic development and growth (allocation of resources, distribution of income).

<ol class="ollevel1"><li>Fiscal Policy and Debt Accumulation <ol class="ollevel2"><li>Government Budget Constraint: Deficits, Debt, Spending and Taxes </li><li>Ricardian Equivalence, Cyclical Adjusted Deficits and War Finance </li><li>The Dangers of High Debt â¨</li></ol><li>The Sovereign Risk <ol class="ollevel2"><li>What is Sovereign Risk?</li><li>Who Evaluates Sovereign Risk?</li><li>Typology and Debt Dynamics </li><li>Debt Indicators and Willingness to Pay </li><li>Methodology </li></ol></ol>

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[...] Government budget constraint: the change in government debt during year t equals the deficit during year Bt - Bt-1 = rBt-1 + Gt - Tt. The term (Gt - Tt) is called the primary deficit and (Tt - Gt) is called the primary surplus, so: Bt - Bt-1 (change in the debt) = rBt-1 (interest payments) + (Gt - Tt) (primary deficit) Bt = Bt-1 + (Gt - Tt)  The stock of debt in t is equal to the stock in plus interest payments, plus the primary deficit (flow). [...]

[...] Which origins? Does the country display structural weaknesses? Which impact on public finances? Do some persisting structural characteristics of the country explain the past sovereign crises? Analyze debt indicators: Public Debt ratios allow relating a debt level to a certain ability to repay. Various debt ratios of GDP of fiscal revenues of exports) because all do not reflect the same constraints Debt composition: short term vs. long term, domestic vs. [...]

[...] Does the public debt-level match with the State's repayment ability? Review the main fiscal indicators: Level and structure of public revenues   Level and structure of public spending   Level of fiscal deficit and how it is covered   May a bad shock on the fiscal position trigger quickly excess indebtedness? Finally, look at indicators of vulnerability to an external shock: EXR regime Level and structure of total external debt Inflation Can an adverse EXR shock deteriorate the government repayment capacity? [...]

[...] World business cycle Sovereign defaults tend to happen in "clusters", due to global interconnections and investor "herd" behavior (abrupt fluctuations in commodity prices, international financial crises) Sovereign risk has to be jointly analyzed with the situation of the global economy Debt Indicators and Willingness to Pay Solvency ratios: stock vs. net present value (NPV) of the debt divided by: GDP Exports Fiscal revenues Liquidity ratios: debt service divided by Exports Fiscal revenues   To keep in mind: NPV vs. stock includes the various loan characteristics (currency, maturity, standstill/grace period, interest rate, other costs). One is backward looking, the other forward-looking. [...]

[...] Country Risk: Fiscal Policy and Public Debt Fiscal Policy and Debt Accumulation Governments refer to (elected) people who form the administrative body of a country. They are important because they take into account externalities and finance public goods (which the private sector would not want/manage to finance). Their objectives are education, national defense, low crime, income distribution, economic stability, etc. Fiscal policy to achieve these objectives has two main instruments, which are spending and taxation Using fiscal policy, governments can influence economic development and growth (allocation of resources, distribution of income) National accounting: Y = C + G + I (for a closed economy) and Y = C + G + I + NX (for an open economy)   But they have to take into account inter-temporal constraints implied by (un)balanced budgets. [...]

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