1.
Assessing debt sustainability
Agnès Bénassy-Quéré
Sovereign debt Crises: Prevention and Management, Rome, 10 December 2018

2.
Who’s safe?
Gross government debt, % of GDP
Source: Ameco.

3.
Who’s safe? (ctd)
Government deficit, % of GDP
Source: Ameco.

4.
Factors influencing debt sustainability
Macro factors
 r-g over a very long period
 Optimal debt level
Willingness to pay
 Tax pressure, tax evasion, efficiency of the public sector, perceived equity
 Debt ownership
Currency
 Foreign currency debt more likely to be restructured, other things equal
 Domestic currency: risk of monetization?
Off-balance sheet liabilities
 Ageing
 Too-big-to-fail banks
Government assets (?)
Liquidity
 Debt level + average maturity  Gross financing needs

5.
Ageing and health care
Source: IMF, Fiscal Monitor, April 2018.

6.
Deficit and gross financing needs, 2018
Source: IMF, Fiscal Monitor, April 2018.

7.
The tax sustainability gap
Blanchard (1990), Blanchard et al. (1990)
 Sustainable tax rate (𝜏∗
): total tax rate consistent with stable debt ratio
 Tax gap: 𝜏∗
− 𝜏 (alternatively: primary balance gap)
Bénassy-Quéré and Roussellet (ITPF 2014)
 Tax gaps for EU countries at the 4 and 50-year horizons
 Impact of ageing and of r-g
 Comparison with IMF (<60%, 10 years), EC (S2 – stable debt/GDP, 50 years)
and rating agencies
 Impact of TBTS banks

8.
Impact of TBTF banks
Methodology
 EBA (2011): Consolidated RWA-core tier 1 under stress scenario  potential
bailout cost  fixed cost in % of GDP over next 4 years
 Binominal tree that stops in case of crisis (no more crisis after)
 Yearly probability between 0 and 10%
 annualized expected cost for the government
 Alternatively: V-lab (Acharya et al. 2010), or econometric estimations for 60
systemic banking crisis over 1977-2010 (Reinhart&Rogoff 2010; Laeven&Valencia
2008, 2010 databases)
 Unconditional probability: 2.78%, average fiscal cost 14.3% of GDP
 Expected cost as a function of explanatory variables over the next 4 years.

9.
Results (RWA)

10.
Results (macro)

11.
Conclusion: how to improve on debt sustainability
Fiscal factors
• Primary surplus (ambiguous)
• Pension reforms
Macro factors
• Long-term growth
• Interest rates (multiple equilibria)
• Borrowing needs of the private sector
Political factors
• Government efficiency, perceived equity
Banking factors
• Capital requirements, bail-in rules
• Doom loop (ambiguous)