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Business and Economics > Public Finance

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Cover IMF Working Papers
A Debt Crisis with Strategic Investors: Changes in Demand and the Role of Market Power
Ricardo Alves Monteiro
This paper documents changes in investors' demand for sovereign debt during a debt crisis. Using a dataset containing individual bids on Portuguese debt auctions, I document that bid functions become more inelastic during the crisis. That is, investors require bigger drops in price to buy additional units of debt, increasing the government’s marginal cost of issuing debt. I then decompose these changes in demand into two components: a fundamental component, due to changes in the valuation of the security, and a strategic component, that arises from investors' market power. I find that, although the role of market power is negligible in normal times, it gets more pronounced leading up to and during the crisis. The government is not able to extract the full surplus from strategic investors, and, as a result, the auction mechanism loses efficiency during that period. Finally, I discuss a possible mitigation strategy. Everything else constant, the use of shorter maturities could avoid higher inefficiency costs.
Keywords:
Debt auctions; default risk; demand elasticity; market power; debt auction; auction mechanism; investors' market power; mitigation strategy; bid function; Treasury bills and bonds; Debt default; Europe
Cover IMF Staff Country Reports
Portugal: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Portugal
International Monetary Fund. European Dept.
The 2024 Article IV Consultation highlights that Portugal recovered strongly from the successive shocks that hit the global economy since the pandemic. Growth in 2023 continued to exceed the euro area average, driven by strong private consumption, net exports, and investment supported by EU funds. Increasing labor force participation and net positive migration led to higher hours worked while unemployment remains at historically low levels. Inflation has decelerated fast. A large fiscal surplus was achieved in 2023, and public debt was reduced to 99 percent of gross domestic product (GDP)—a remarkable 36 percentage points of GDP since 2020. The external position strengthened, supported by vigorous exports including tourism, EU funds, and improved terms of trade. Financial stability indicators improved, reflecting a reduction in systemic risks. Growth is projected to remain robust in the near term, and inflation is projected to decelerate further. However, low productivity growth, population aging, and subdued investment remain constraints to higher growth and better living standards over the medium term.
Keywords:
first-time safeguards assessment; consultation discussion; safeguards recommendation; subdued productivity growth; General government account; growth projection; labor market duality; Labor markets; Inflation; Fiscal stance; Global
Cover IMF How To Notes
How to Implement Electronic Fiscal Reporting (Fiscalization)
José Maria Pires
,
Stephen Howlin
, and
Mr. Frank van Brunschot
To improve the management of tax compliance risks, tax administrations are increasingly seeking opportunities to enhance their access and use of data. For many years, there has been a worldwide trend to implement electronic fiscal reporting (also known as fiscalization) to achieve these aims. Fiscalization refers to the process of automated reporting of a taxpayer’s business activities to the tax administration. When implemented as an integral part of compliance risk management processes, fiscalization will contribute to an improvement in tax compliance by making it easier for taxpayers to voluntarily comply, and discouraging taxpayers who may choose to not report their business transactions. However, fiscalization alone will not address all tax compliance risks. This how-to note provides practical guidance about the case for fiscalization and implementation approaches, including good practices and practices to avoid in relation to the key dimensions of fiscalization: data collection, data analysis, integration with compliance risk management, consumer engagement, and implementation.
Keywords:
tax compliance; fiscalization; electronic fiscal devices; discouraging taxpayer; IMF Library; business activities; implementation approach; CRM processes; Tax administration core functions; Data collection; Fiscal reporting; Tax return filing compliance; Compliance risk management; Global
Cover IMF Working Papers
The Economics of Sovereign Debt, Bailouts, and the Eurozone Crisis
Pierre-Olivier Gourinchas
,
Philippe Martin
, and
Todd Messer
Despite a formal ‘no-bailout clause,’ we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of 2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road.’ Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
Keywords:
Euro area; Monetary Union; Sovereign debt; bailouts; Eurozone crisis; bailout size; no-bailout clause; debt country; debtor country; Monetary unions; Loans; Collateral; Debt default; Global
Cover Selected Issues Papers
Optimal Fiscal Path Considerations: Portugal
Mr. Ippei Shibata
and
Mr. Volodymyr Tulin
Despite achieving a rapid reduction in the public debt-to-GDP ratio in recent years, Portugal's debt ratio remains relatively high at 113.9 percent of GDP in end-2022. This paper employs an analytical model to determine the appropriate trajectory for structural consolidation to sustain ambitious debt reduction over the medium term, taking into account the uncertainties in the economic landscape. The model points to a need for continued fiscal tightening between 2024 and 2028. Optimal consolidation would be higher under higher longterm interest rates, lower medium-term growth prospects, or increased market sensitivity to debt.
Keywords:
Fiscal stance; cycle stabilization; government deficit; government debt; Washington, D.C. International Monetary Fund; Portugal's debt ratio; model point; interest rate sensitivity; I. model detail; Real interest rates; Fiscal consolidation; Government debt management
Cover IMF Staff Country Reports
Portugal: 2023 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
This 2023 Article IV Consultation with Portugal discusses that the economy sustained its dynamic recovery from the pandemic into 2022. Growth is projected to soften for the rest of the year to average 2.6 percent in 2023 and 1.8 percent in 2024. Inflation is expected to continue to ease over 2023 but remain above 2 percent in the near term. The current account deficit is expected to narrow as terms-of-trade normalize and external demand strengthens. The banking system and household and corporate sectors have been resilient to recent shocks so far. However, tighter financial conditions, amid a buoyant housing market, have increased financial risks. A stronger medium-term fiscal effort relative to the baseline, comprising both revenue and expenditure measures, would build fiscal space and mitigate debt-related risks further and improve resilience to contingency risks. Structural policies should continue focusing on boosting productivity growth.
Keywords:
portfolio investment data collection system; housing supply; money market rate; IMF staff calculation; special purpose entity data collection initiative; housing market strain; Fiscal stance; Labor markets; Systemic risk; Global
Cover IMF Working Papers
Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design
Vybhavi Balasundharam
,
Olivier Basdevant
,
Dalmacio Benicio
,
Andrew Ceber
,
Yujin Kim
,
Luca Mazzone
,
Hoda Selim
, and
Yongzheng Yang
Surges in public debt in many countries since the COVID-19 pandemic have rekindled interest in fiscal consolidations, which often entail difficult policy choices in the face of economic and political constraints. This paper presents findings from a survey of the literature on fiscal consolidations, focusing on the pre-existing conditions, impact and design aspects of past consolidation episodes. These findings provide insight into factors that influence the chance of successful consolidations, their growth and distributional impact, the pace, phasing, duration and policy mix of reforms to mitigate the impact, and the role of fiscal institutions and capacity development in successful consolidations.
Keywords:
Fiscal Consolidation; taxation; government spending; institutions; self-defeating fiscal consolidations; literature finding; spending cut; real value; expenditure measure; debt ratio; revenue reform; Inflation; Global
Cover IMF Working Papers
Scarring and Corporate Debt
Julia Estefania-Flores
,
Davide Furceri
,
Pablo Gonzalez-Dominguez
,
Siddharth Kothari
, and
Nour Tawk
This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high debt firms seeing a larger decline in investment than low debt firms. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28 percent of the average medium-term decline of investment following a recession. This effect is especially larger for firms that are credit constrained—small and less profitable firms, as well as firms with high share of short-term debt—and that therefore may find it more difficult to rollover or raise new funds to invest in new projects. The results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls.
Keywords:
Scarring; Corporate Debt; Recessions; Firms; Local Projection; scarring effect; debt dummy; debt firm; investment to recession; Economic recession; Capital spending; Global
Cover Staff Discussion Notes
The State as Financier of Last Resort
Bryn Battersby
,
Mr. Raphael A Espinoza
,
Jason Harris
,
Mr. Gee Hee Hong
,
Mrs. Sandra V Lizarazo Ruiz
,
Mr. Paolo Mauro
, and
Amanda Sayegh
During the COVID-19 pandemic and global financial crisis, governments swiftly served as financiers of last resort through large financial support measures (FSMs) such as loan and guarantee programs and equity injections in firms. This Staff Discussion Note argues that such FSMs prevented bankruptcies and attenuated the recession by increasing firms’ liquidity, reducing risk premiums, and boosting confidence. But FSMs also carry large and long-lasting fiscal costs and risks. The note presents recommendations for managing the legacies of the COVID-19 programs and preparing for future crises. Ideally, FSMs should be assessed and included in budget plans, though a balance needs to be struck between speed and scrutiny.
Keywords:
Fiscal policy; Below the line; Equity injections; Government guarantees; Government loans; Bailout; Fiscal risks; Public sector balance sheet; equity injection; credit guarantees program; pre-existing FSM framework; government loan; equity purchase; Loans; COVID-19; Solvency; Credit; Global
Cover IMF Working Papers
Rationalizing Pharmaceutical Spending
Manuel García-Goñi
Pharmaceutical spending accounts for a large share of health spending worldwide. While pharmaceuticals are an indispensable component of effective modern health systems, and their benefits in terms of increasing life expectancy and improving quality of life are unquestionable, the large variation in pharmaceutical spending across countries suggests that there may be large efficiency gains to be realized. This paper reviews the existing literature and databases on the level and composition of pharmaceutical spending and estimates potential efficiency gains from increased use of generics. It also reviews how countries organize the procurement and tendering of pharmaceuticals and the implications for spending. Finally, the paper identifies the various channels through which spending inefficiencies can arise and identifies reform options for reducing pharmaceutical spending while ensuring quality health outcomes.
Keywords:
Pharmaceutical spending; pharmaceutical policy; generics; biosimilar; procurement; economic evaluation; volume share; percentage value share; share of generic; efficiency gain; Health care; Health care spending; Consumption; Global; Europe