Back Matter

Back Matter

International Monetary Fund. Fiscal Affairs Dept.
Published Date:
April 2013
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    Projections do not include the impact of the government’s proposal to clear payment arrears.

    The large change in the cyclically adjusted balance series relative to the October 2012 Fiscal Monitor reflects a revision in the potential output series agreed between Italy and the European Union.

    Cash flow benefits in 2013 will be lower because of transaction costs.

    The Fiscal Compact (part of the Treaty on Stability, Coordination and Governance) entered into force in January 2013. For more details on the compact, see the April 2012 Fiscal Monitor.

    Significant uncertainty surrounds the estimates of savings, and health care cost growth has been surprisingly sluggish in recent years, yet there is no guarantee that this favorable trend will continue.

    An updated guidance note on debt sustainability is under preparation. See IMF (2011a).

    When the interest rate–growth differential is positive, stabilizing the debt-to-GDP ratio ensures that the intertemporal budget constraint (or, equivalently, the non–Ponzi game condition) is met (see Escolano, 2010); this means that the net present value of future primary surpluses (the government’s main asset) is equal to the debt stock. With assets fully covering liabilities, the government is technically solvent and the debt is sustainable as long as the corresponding primary balances can be sustained.

    See, for example, Baldacci and Kumar (2010), Poghosyan (2012), Kumar and Woo (2010, 2013), Caner, Grennes, and Koehler-Geib (2010), Cecchetti, Mohanty, and Zampolli (2011), Baum, Checherita-Westphal, and Rother (2012), and Ursua and Wilson (2012) on debt and interest rate and debt and growth and Reinhart, Reinhart, and Rogoff (2012) for a survey of the literature on public debt and growth. A notable exception, Panizza and Presbitero (2012), does not find a causal relationship between high debt and lower growth.

    Another factor contributing to low sovereign interest rates is the ongoing private sector deleveraging, which has resulted in higher net private savings—a natural source of demand for government paper. As this process will run its course at some point, interest rates will rise unless governments wind down their deficits.

    An additional source of fiscal risks is the data shortcomings in some countries. As discussed in IMF (2012a), despite concerted efforts to develop a set of internationally accepted standards for fiscal transparency and to monitor and promote the implementation of those standards at the national level, understanding of governments’ underlying fiscal position and the risks to that position remains inadequate in many cases.

    The actual debt may well be higher, as the estimate includes only bonds issued by government-owned or government-related institutions but excludes bank loans, which may be an important funding source.

    Data on guarantees and other contingent liabilities for emerging market economies are scant. Nevertheless, as discussed in Box 4, monitoring is warranted, highlighting the need to strengthen reporting requirements.

    The impact of the unexpected fall in output was even larger (about one-quarter). For more details, see the October 2012 Fiscal Monitor.

    The literature on public debt thresholds has attempted to pin down both the optimal and safe debt levels; the optimal-debt concept has remained at a fairly abstract level, whereas the safe-debt concept has focused largely on empirical applications. The literature on safe debt levels can be divided into three main strands (Jarmuzek and Miao, 2013). The initial focus was on the concept of the long-run debt that would be consistent with the solvency condition, abstracting from debt distress (Blanchard and others, 1990; Buiter, 1985). The two later strands have taken certain positions on the probability that debt distress occurs. The first has focused on identifying debt thresholds beyond which the risk of debt distress increases rapidly (Baldacci and others, 2011; Ghosh and others, 2011), whereas the second has focused on identifying debt thresholds encompassing safety margins that ensure resilience to various kinds of shocks with a high degree of probability (Mendoza and Oviedo, 2004; Cottarelli and others, 2013).

    The benchmark has been to stabilize debt at the end-2013 level if it is below the 60/40 percent benchmark.

    Previous medium-term scenarios assumed an earlier alignment of the interest rate–growth differential with model-based levels. The current approach incorporates a longer cyclical effect over the coming five years. Also, the analysis does not take into account the effect of fiscal multipliers on fiscal adjustment. However, in practice, the adjustment needs could be underestimated in the early years, particularly where multipliers are high.

    Sensitivity analyses were not conducted for Greece, as it is expected to remain off market for a large part of the adjustment horizon.

    See Abiad and Ostry (2005). The caveat that appropriate country-specific estimates vary applies here too, for example, because of differences in potential growth which could also feed back into investor confidence and risk premiums.

    By comparison, the required improvement in the cyclically adjusted primary balance simply to stabilize the debt at its current level would be about 2½ percent of GDP.

    For a detailed description, see Mauro and others (2013). See also the Public Finances in Modern History Database ( For the purpose of this analysis, the sample has been restricted to 43 countries (24 advanced and 19 emerging market economies). For related work based on more limited databases, see Tsibouris and others (2006), Abbas and others (2010), Zeng (2013), and the October 2012 Fiscal Monitor.

    These include, for example, financial repression and inflation. However, as noted in the October 2012 World Economic Outlook, it is unclear whether financial repression is still a viable policy option given current levels of financial integration.

    For each country, a maximum primary surplus is identified over the period 1950–2011. Unless otherwise indicated, the median of the distribution of maximum primary surpluses is reported for the whole sample of countries (24 advanced and 19 emerging market economies) throughout.

    Henceforth “large fiscal adjustments” refer to maximum five-year moving-average primary balances.

    A consolidation episode here is defined as the change in the two-year average of the primary balance over a six-year period (IMF projection period, current year plus five years), with at least five years elapsing between one identified consolidation period and another.

    The October 2012 World Economic Outlook discusses the experiences of countries reducing debt and concludes that fiscal consolidation efforts need to be complemented by measures that support growth.

    In the case of Argentina, the event study covers the period 1998–2011. The large debt reduction from a peak of over 160 percent of GDP in 2002 reflects, in addition to debt restructuring, continued primary surpluses coupled with high real GDP growth rates and persistently negative real interest rates.

    For ease of exposition, a fixed interest rate–growth differential is assumed for all countries regardless of the debt level. The reference level of the interest rate–growth differential is 1. Two sensitivity analyses consider shocks of +/—100 basis points to the reference interest rate–growth differential. The numbers are therefore not strictly comparable to those presented in the text and Statistical Table 13a but, as will become apparent from Figure 14, yield qualitatively similar conclusions.

    If maturity were to shorten in response to the inflation shock, the impact of inflation on the reduction would be somewhat smaller.

    Fiscal dominance can be defined as a situation in which monetary policy is driven by the need to ensure fiscal sustainability when fiscal policy cannot adjust.

    Default is the failure of a government to make a principal or interest payment on time. In most cases, restructuring occurs after default, through a debt rescheduling (lengthening maturities, possibly lowering interest rates) and/or reduction (in the face of the nominal value of old instruments).

    The empirical literature finds that market access after debt restructuring depends on the specifics of the individual cases. For example, a one-standard-deviation increase in haircuts is associated with a 50 percent lower likelihood of reaccessing international capital markets in any year after the restructuring (Cruces and Trebesch, 2011). In more recent cases the exclusion from capital markets has been shorter compared to those in the 1980s (Gelos, Sandleris, and Sahay, 2011) but the postrestructuring access comes with a higher borrowing cost.

    For example, Das and others (2012) look at 18 restructuring episodes during the period 1998–2010 and find that the public debt—to—GDP ratios declined from a median of over 50 percent of GDP to about 35 percent of GDP. On the other hand, Benjamin and Wright (2009) look at 90 default episodes during the period 1989—2006 and find that the creditor losses averaged roughly 40 percent but the debt-to-GDP ratio of the average country was 25 percent higher than before the debt restructuring.

    See Bova and others (2013) for a review the experience of nine advanced economies in managing nonfinancial assets.

    For Japan, nonfinancial assets that the IMF staff considers could potentially be disposed of in the long term are those that are under the direct control of the Ministry of Finance. Data are from the Japan Cabinet Office of the Ministry of Finance. Data for Italy are from IntesaSanPaolo (2012). The Italian government has announced plans to sell real estate assets of about €15–20 billion per year for the next five years.

    For a discussion of expenditure and revenue consolidation measures that also support economic growth, see IMF (2010a).

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