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Fiscal Crises

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Presentation from ADEMU Fiscal Risk and Public Sector Balance Sheets Conference at the University of Bonn, July 6-7

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Fiscal Crises

  1. 1. Fiscal Crises Tigran Poghosyan IMF, Fiscal Affairs Department ADEMU Workshop “Fiscal Risk and Public Sector Balance Sheets” University of Bonn, July 6-7, 2017 This presentation is based on an IMF working paper WP/17/86 authored by Juan Farah-Yacoub, Kerstin Gerling, Paulo Medas, Tigran Poghosyan and Yizhi Xu. The views are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
  2. 2. Motivation  Fiscal sustainability is a key policy objective …  … but empirical identification of fiscal crises is scarce  Previous literature  Focuses mainly on public debt defaults (legal definition) …  … mostly external …  … mostly in advanced and emerging economies  Baldacci et al. (2011) is an exception (economic criteria) • Also adopted by the EC recently (Sumner & Berti 2017)  Our contribution  Wider country and time coverage (all 188 IMF members, 1970-2015)  Improved identification methodology  Event study analysis – dynamics of macroeconomic variables around fiscal crises 1IMF, Fiscal Affairs Department Our database 436 fiscal crises in total, of which:  25 in Advanced Markets (AM)  154 in Emerging Markets (EM)  171 in Low-Income and Developing Countries (LIDC)  86 in Small Developing States (SDS) Existing databases  Reinhart & Rogoff (2011): 75 external and 26 domestic defaults  Baldacci et al. (2011): 176 fiscal crises  Laeven & Valencia (2012): 67 debt defaults  Bruns & Poghosyan (2016): 201 fiscal crises  Sumner & Berti (2017): 88 fiscal crises
  3. 3. Outline I. New Database on Fiscal Crises II. Descriptive statistics III. Empirical Analysis IV. Concluding remarks 2IMF, Fiscal Affairs Department
  4. 4. I. New Database on Fiscal Crises 3IMF, Fiscal Affairs Department
  5. 5. Red Flags: How To Identify Fiscal Crises? 4IMF, Fiscal Affairs Department • Any year in which actions of the sovereign reduce the PV of public debt • Exclude technical defaults • Examples: Bulgaria 1990; Macedonia 2010 1. Credit event • Any year under a large IMF financial arrangement … • … with fiscal adjustment as a program objective • Examples: Hungary 2008; Ireland 2010 2. Official financing • Any year with a very high inflation • Any year with domestic arrears accumulation (new!) • Examples: Belarus 1999; Russia 2007 3. Implicit default • Any year with a very high price of market access • Any year with loss of market access (new!) • Examples: Ukraine 2008; Romania 2009 4. Market confidence
  6. 6. IMF, Fiscal Affairs Department 5 Criterion Sources AMs EMs LIDCs SDSs (1) Credit event Any operation that makes creditors incur material economic losses on the sovereign debt they hold (e.g. default, restructuring, or rescheduling) (i) of substantial size (in percent of GDP p.a.) (ii) if (i) holds and the defaulted nominal amount grows by a substantial amount (in percent p.a) (2) Exceptionally large official financing High-access IMF financial arrangement with fiscal adjustment objective in place (in percent of quota) ▪ IMF Strategy, Policy, and Review Department (SPR) as well as Finance Department (FIN) (3) (a) High inflation rate (in percent of growth of annual average CPI p.a.) ≥ 35 ≥ 35 ▪ IMF WEO (b) Steep increase in domestic arrears (in first difference of the ratio of 'other account payables (OAP)' to GDP in percentage points) ▪ OECD and Eurostat (4) (a) Loss of market access ▪ Guscina, Sheheryar and Papaioannou (2016) ▪ For gaps: authors' research based on Gelos, Sahay, and Sandleris (2004) and rating agencies' reports ▪ For gaps: authors' research based(b) High price of market access (in basis points, sovereign spreads or CDS spreads) ▪ Reuters Datastream, Bloomberg, IMF IFS Thresholds ▪ Bank of Canada (2016) ▪ For gaps: authors' research based on rating agency reports (esp. Moody's and S&P), WB IDS and WDI data, and Cruces and Trebesch (2013)>0.2 ≥ 10 ≥ 100 ≥ 100 ≥ 1 Loss of market confidence when market access is lost (after maintaining market access for a 1/4 of the sample time and 2 consecutive years before the loss year) ≥ 1,000 bps Implicit domestic public default Note: AM = advanced markets, EM = emerging markets, LIDC = low-income and developing countries, SDS = small developing states.
  7. 7. II. Descriptive Statistics 6IMF, Fiscal Affairs Department
  8. 8. Fiscal Crisis Episodes (1970-2015) IMF, Fiscal Affairs Department 7 Source: Authors’ calculations. AM = advanced markets, EM = emerging markets, LIDC = low-income and developing countries, SDS = small developing states. Total AM EM LIDC SDS With start date within sample period 436 25 154 171 86 Average per country 2.3 0.7 2.2 3.4 2.6 With start and end date within sample period 400 23 143 154 80 Average per country 2.1 0.7 2.0 3.1 2.4 Memorandum items: Number of countries with no fiscal crisis 37 20 9 1 7
  9. 9. Dynamics of Fiscal Crises 8 0 20 40 60 80 100 120 140 1970 - 1979 1980 - 1989 1990 - 1999 2000 - 2004 2005 - 2009 2010 - 2015 By Criteria Credit event Exceptional financing Implicit default Market confidence 0 10 20 30 40 50 1970 - 1979 1980 - 1989 1990 - 1999 2000 - 2004 2005 - 2009 2010 - 2015 By Country Groups Advanced Emerging Low Income Small Developing States IMF, Fiscal Affairs Department
  10. 10. Overlap between Fiscal, Banking, and Currency Crises 9 Fiscal crises 335 Currency crises 122 Banking crises 82 23 14 47 28 IMF, Fiscal Affairs Department Source: Laeven and Valencia (2012), authors’ calculations.
  11. 11. III. Empirical Analysis 10IMF, Fiscal Affairs Department
  12. 12. Event Study  Empirical regularities during the 11-year time window around fiscal crises (Gourinchas & Obstfeld 2012; Catao & Milesi-Ferretti 2014)  Does not necessarily imply causality 𝑦𝑖𝑡 = 𝛼𝑖 + ෍ 𝑗=−5 5 𝛽𝑗 𝐹𝑡+𝑗 + 𝜀𝑖𝑡 where: y = variable of interest (e.g., real GDP p.c. growth, public debt-to-GDP ratio) F = dummy variables taking the value of 1 in period t+j, where t is the fiscal crisis year  = conditional effect of a crisis over the event window relative to tranquil times 11IMF, Fiscal Affairs Department
  13. 13. What Happens Around Fiscal Crises? 12 -10.0 -5.0 0.0 5.0 10.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Public debt (% of GDP) -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Real expenditure growth (%) -10.0 -5.0 0.0 5.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Primary balance (% of GDP) -3.0 -2.0 -1.0 0.0 1.0 2.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Real GDP p.c. growth (%) IMF, Fiscal Affairs Department Note: Reported are coefficient estimates with 95% confidence intervals.
  14. 14. Fiscal Crises and Growth: By Country Groups 13 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 AM -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 EM -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 LIDC -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 SDS IMF, Fiscal Affairs Department Note: Reported are coefficient estimates with 95% confidence intervals. AM = advanced markets, EM = emerging markets, LIDC = low-income and developing countries, SDS = small developing states.
  15. 15. Fiscal Crises and Growth: By Criteria 14IMF, Fiscal Affairs Department -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 1. Credit event -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 2. Official financing -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 3. Implicit default Note: Reported are coefficient estimates with 95% confidence intervals. -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 4. Market confidence
  16. 16. Event Study – Twin Crises  Empirical specification: 𝑦𝑖𝑡 = 𝛼𝑖 + ෍ 𝑗=−5 5 𝛽𝑗 𝐹𝑡+𝑗 + ෍ 𝑗=−5 5 𝛾𝑗 𝐹𝐵𝑡+𝑗 + ෍ 𝑗=−5 5 𝛿𝑗 𝐹𝐶𝑡+𝑗 + 𝜀𝑖𝑡 where: y = macro variable of interest (e.g., growth, public debt ratio) F = fiscal crisis dummy FB = twin fiscal-banking crisis dummy FC = twin fiscal-currency crisis dummy  = effect of a fiscal crisis  = additional effect of a twin fiscal-banking crisis  = additional effect of a twin fiscal-currency crisis 15IMF, Fiscal Affairs Department
  17. 17. Twin Fiscal-Banking Crises 16IMF, Fiscal Affairs Department -30 -20 -10 0 10 20 30 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 -6 -5 -4 -3 -2 -1 0 1 2 3 4 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Real GDP p.c. growth (%) Note: Reported are coefficient estimates with 95% confidence intervals. Public debt (% of GDP)
  18. 18. Twin Fiscal-Currency Crises 17IMF, Fiscal Affairs Department -30 -20 -10 0 10 20 30 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 -6 -5 -4 -3 -2 -1 0 1 2 3 4 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Public debt (% of GDP) Note: Reported are coefficient estimates with 95% confidence intervals. Real GDP p.c. growth (%)
  19. 19. IV. Concluding Remarks 18IMF, Fiscal Affairs Department
  20. 20. Conclusions  A new IMF database on fiscal crises  Updated annually (https://www.imf.org/en/Publications/WP/Issues/2017/04/03/Fiscal-Crises-44795)  Large sample (including LIDCs, over 4½ decades) …  … but some challenges remain (variability of quality/available data across criteria, time, and country groups)  Helps understanding implications of fiscal crises  Crises are disruptive: economic recession, indebtedness rises …  … but effects can vary across country groups and crisis criteria  Twin crises can be even more disruptive  Can be used to conduct further research  e.g., early warning exercises, causal effects of fiscal crises 19IMF, Fiscal Affairs Department
  21. 21. Thank you! 20IMF, Fiscal Affairs Department
  22. 22. Background Slides 21IMF, Fiscal Affairs Department
  23. 23. Types of Fiscal Crises per Country Groups IMF, Fiscal Affairs Department 22 AM EM LIDC SDS Credit event 0 85 141 71 Official financing 11 40 29 6 Implicit default 13 18 9 7 Market confidence 7 25 4 3 Source: Authors’ calculations.
  24. 24. Percent of Cases with Negative Real GDP Per Capita Growth IMF, Fiscal Affairs Department 23 Source: Authors’ calculations. Total crisis episodes t-3 t-2 t-1 t t+1 t+2 Total 436 24.8 25.5 28.2 40.6 33.9 29.8 AM 25 12.0 28.0 28.0 48.0 60.0 48.0 EM 154 22.1 20.8 28.6 49.4 40.3 29.2 LIDC 171 29.8 28.1 28.1 33.9 29.2 29.8 SDS 86 23.3 27.9 27.9 36.0 24.4 25.6

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