Does a Clarke-Groves type tax prevent free riding when implementing Eurobonds?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carlos Contreras ◽  
Julio Angulo
Keyword(s):  
Public Debt ◽  
Sovereign Debt ◽  
Free Riding ◽  
Social Utility ◽  
Liquidity Premium ◽  
Transfer Scheme ◽  
Content Type ◽  
Depth Analysis ◽  
Fiscal Rule ◽  
Debt Levels

Purpose The purpose of this paper is to propose a Clarke-Groves Tax (CGT) type as a remedy to the criticism that the implementation of Eurobonds has raised regarding the risk of undermining fiscal discipline. In this model, a government minimizes its sovereign debt-to-GDP ratio in a given period and decides whether to join a common sovereign debt club. In doing so, it exposes itself to a positive or negative tax burden while benefiting from the liquidity premium involved in creating a secure asset. The authors found that the introduction of this tax may prevent free riding behaviours if Eurobonds were to be implemented. To illustrate this, the authors provide some numerical simulations for the Eurozone. Design/methodology/approach In the model presented, a government which optimizes a social utility function decides whether to join the common debt club. Findings The adoption of the proposed tax could prevent free-riding behaviours and, therefore, encourages participation by those countries with lower debt levels that would have not otherwise taken part in this common debt mechanism. Under certain circumstances, we can expect the utility of all members of this club to improve. The bias in the distribution of gains might be mitigated by regulating the tax rule determining the magnitude of payment/reward. The proportion of the liquidity premium, arising from the implementation of a sovereign safe asset, has a decisive impact on the degree of the governments’ utility enhancement. Research limitations/implications The adoption of a CGT would require Eurobonds club members to reach an agreement on “the” theoretical model for determining the sovereign debt yield. One of the limitations of this model is considering the debt-to-GDP ratio as the sole determinant of public debt yields. Moreover, the authors assumed the relationship between the debt-to-GDP ratio and funding costs to be identical for all countries. Any progress in the implementation of the proposed transfer scheme would require a more realistic and in-depth analysis. Practical implications A new fiscal rule based on compensating countries with lower public debt levels could be a way to mitigate free-riding problems if a Eurobond mechanism is to be established. Originality/value This fiscal rule has not been proposed or analysed before in a context such as that considered by this paper.

Vietnam's debt woes will concern investors

2015 ◽  
Keyword(s):  
Public Debt ◽  
Development Projects ◽  
Foreign Investors ◽  
Content Type ◽  
Borrowing Costs ◽  
Fund Development ◽  
Debt Levels

Subject Vietnam's debt difficulties. Significance Vietnam's Finance Ministry announced on May 15 that it would continue to use offshore borrowings to fund development projects, although many economists caution that public debt levels are unsustainable, potentially harming Vietnam's image with investors. There are concerns that government liabilities may be higher than reported, and that recent monetary initiatives, including currency devaluations, may aggravate the situation. Impacts Borrowing costs will rise, and Vietnam could face a credit downgrade if debt limits are reached. Foreign investors will respond cautiously to reforms of infrastructure partnership regulations. Vietnam's ability to capitalise on ASEAN infrastructure integration may be hindered.

Slovakia will not change export-led model overnight

2015 ◽  
Keyword(s):  
Public Debt ◽  
Purchasing Power ◽  
External Financing ◽  
Bond Yields ◽  
Content Type ◽  
Breathing Space ◽  
Debt Levels

Significance Impacts The IPO should help cut public debt levels and will create fiscal breathing-space for more spending ahead of the 2016 elections. Falling bond yields will ease debt servicing; Slovakia will comfortably meet its external financing requirement. The deflationary trend will peter out later in 2015 but persistently low inflation will help boost household purchasing power.

Oman and Bahrain are the most vulnerable Gulf states

2020 ◽  
Keyword(s):  
Public Sector ◽  
Public Debt ◽  
Medium Term ◽  
Fiscal Deficits ◽  
Content Type ◽  
Gulf States ◽  
Remittance Flows ◽  
Debt Levels

Significance Oman and Bahrain, already struggling with rising public debt levels and high fiscal deficits, are in the most exposed medium-term position. Impacts Governments will seek to avoid cutting expenditure on public-sector salaries. Private businesses will lay off many of their expatriate workers. Gulf economic contractions will significantly reduce global remittance flows.

What debt threshold hampers economic growth in Africa?

2019 ◽  
Vol 19 (1) ◽  
pp. 25-42 ◽  
Author(s):  
Lord Mensah ◽  
Divine Allotey ◽  
Emmanuel Sarpong-Kumankoma ◽  
William Coffie
Keyword(s):  
Economic Growth ◽  
Public Debt ◽  
Developed Countries ◽  
Annual Data ◽  
African Region ◽  
African Countries ◽  
Content Type ◽  
Distributed Models ◽  
The Impact ◽  
Debt Levels

Purpose This paper aims to test whether a debt threshold of public debt has any effect on economic growth in Africa. Design/methodology/approach The authors applied the panel autoregressive distributed models on 38 African countries with annual data from 1970 to 2015. It was established that the threshold and the trajectory of debt has an impact on economic growth. Findings Specifically, the authors found that public debt hampers economic growth when the depth is in the region of 20 to 80 per cent of GDP. Based on debt trajectory, this study established that increasing public debt beyond 50 to 80 per cent of GDP adversely affects economic growth in Africa. The study also finds that the persistent rise in debt also has adverse effect on economic growth in the African countries in the sample. It must be known to policymakers that the threshold of debt in developing countries, and for that matter African countries, are less than that of developed countries. Practical implications This study suggests threshold effects between 20 and 50 per cent; this should be a guide for policymakers in the accumulation of debt stock. Interestingly, the findings suggest some debt trajectory effect, which policymakers might consider by increasing efforts to reduce debt levels when they fall between 50 to 80 per cent of GDP. This implies that reducing such debt levels can help African countries increase their economic growth. Originality/value The study is unique because it seeks to add new evidence on the relationship between public debt and growth in the African region, by considering the impact of the persistent growth of public debt on economic growth.

Rating sovereign debt in a monetary union – original sin by transnational governance

2015 ◽  
Vol 16 (3) ◽  
pp. 253-283 ◽  
Author(s):  
Finn Marten Körner ◽  
Hans-Michael Trautwein
Keyword(s):  
Monetary Union ◽  
Public Debt ◽  
Sovereign Debt ◽  
Foreign Currency ◽  
Debt Crisis ◽  
Emerging Market ◽  
Original Sin ◽  
Risk Assessments ◽  
Content Type ◽  
Local Currency

Purpose – The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. Design/methodology/approach – While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times. Findings – Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010. Practical implications – The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all. Originality/value – In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

A full public debt restructuring overhaul is unlikely

2021 ◽  
Keyword(s):  
Public Debt ◽  
Sovereign Debt ◽  
External Debt ◽  
Poor People ◽  
Debt Restructuring ◽  
Content Type ◽  
Monetary Expansion ◽  
Lost Decade ◽  
Legal Difficulties ◽  
Complete Overhaul

Significance The stock of EM debt has multiplied since 2000, accompanied by legal difficulties for borrowers falling into distress. Some economists are calling for a complete overhaul of the system to handle sovereign debt crises, including the creation of an independent international organisation to manage it. Impacts By eroding tax bases and raising domestic and external debt repayment costs, COVID-19 will have a lasting impact on EM output. Together with collapsing exports, the fiscal blow from the crisis could trigger a wave of distressed governments to default on their debts. EM’s limited recourse to fiscal and monetary expansion could result in a lost decade for hundreds of millions of already poor people.

scholarly journals Instruments of Debtstruction

2019 ◽  
Vol 19 (226) ◽  
Author(s):  
Nicolas End ◽  
Marina Marinkov ◽  
Fedor Miryugin
Keyword(s):  
Interwar Period ◽  
Public Debt ◽  
Sovereign Debt ◽  
Financial System ◽  
Emerging Countries ◽  
Qualitative Information ◽  
International Financial System ◽  
Instrument Type ◽  
Instrument Level ◽  
Debt Levels

We construct a new, comprehensive instrument-level database of sovereign debt for 18 advanced and emerging countries over the period 1913–46. The database contains data on amounts outstanding for some 3,800 individual debt instruments as well as associated qualitative information, including instrument type, coupon rate, maturity, and currency of issue. This information can provide unique insights into various policies implemented in the interwar period, which was characterized by notoriously high debt levels. We document how interwar governments rolled over debts that were largely unsustainable and how the external public debt network contributed to the collapse of the international financial system in the early 1930s.

scholarly journals Interest rate, liquidity, and sovereign risk: derivative-based VaR

2017 ◽  
Vol 18 (4) ◽  
pp. 443-465 ◽  
Author(s):  
Mariya Gubareva ◽  
Maria Rosa Borges
Keyword(s):  
Risk Factors ◽  
Interest Rate ◽  
Credit Risk ◽  
Value At Risk ◽  
Sovereign Debt ◽  
Interest Rate Risk ◽  
Integrated Treatment ◽  
Liquidity Premium ◽  
Content Type ◽  
Rate Risk

Purpose The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration of these risks in the banking book containing sovereign debt. Design/methodology/approach The paper develops the historical derivative-based value at risk (VaR) for assessing the downside risk of a sovereign debt portfolio through the integrated treatment of interest rate and credit risks. The credit default swaps spreads and the fixed-leg rates of interest rate swap are used as proxies for credit risk and interest rate risk, respectively. Findings The proposed methodology is applied to the decade-long history of emerging markets sovereign debt. The empirical analysis demonstrates that the diversified VaR benefits from imperfect correlation between the risk factors. Sovereign risks of non-core emu states and oil producing countries are discussed through the prism of VaR metrics. Practical implications The proposed approach offers a clue for improving risk management in regards to banking books containing government bonds. It could be applied to access the riskiness of investment portfolios containing the wider spectrum of assets beyond the sovereign debt. The approach represents a useful tool for investigating interest rate and credit risk interrelation. Originality/value The proposed enhancement of the traditional historical VaR is twofold: usage of derivative instruments’ quotes and simultaneous consideration of the interest rate and credit risk factors to construct the hypothetical liquidity-free bond yield, which allows to distil liquidity premium.

Armenia and Georgia need external funds for crisis

2020 ◽  
Keyword(s):  
Public Debt ◽  
Health Spending ◽  
Labour Migration ◽  
Content Type ◽  
Tourism Sector ◽  
Business Support ◽  
External Funds ◽  
Oil Revenues ◽  
Debt Levels

Significance Commodity exports have been hit in both countries, the Georgian tourism sector has become a source of weakness, and Armenia is exposed to Russia because of trade and labour migration. Impacts The COVID-19 crisis will create demand for higher health spending in future budgets. The fiscal response will lead to higher public debt levels in Georgia and Armenia. Azerbaijan faces the additional shock of low oil revenues but is planning similar welfare and business support packages.

EU can become a trendsetter and bolster world GDP

2019 ◽  
Keyword(s):  
Public Debt ◽  
Economic Conditions ◽  
Budget Deficits ◽  
Content Type ◽  
The Face ◽  
Economic Slowdown ◽  
Global And Local ◽  
Global Influence ◽  
The Eu ◽  
Debt Levels

Subject The global reach of Germany's fiscal scope. Significance The focus on euro-area debt fragility perhaps obscures the fact that the bloc and broader EU have strengthened their fiscal position. They can afford to take action in the face of the global and local economic slowdown. Public debt levels and budget deficits have shrunk since 2014, especially in Germany and the Netherlands, which enjoy substantial budget surpluses and moderate debt levels. Impacts Action would prevent the EU from looking feeble and unable to respond to, let alone influence, shifts in global economic conditions. A change in perceptions of the EU and its capabilities might boost local and global sentiment, multiplying the influence of any stimulus. Illustrating Germany's global influence, it bought 89.4 billion of dollars of goods from China in 2018 and 57.7 billion dollars of US goods.

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