High Levels Of Public Debt Research Articles

THE SOCIAL DIMENSION OF THE ASSET QUALITY REVIEW IN THE EUROPEAN UNION

During the financial crisis that started in 2008, banks in the European Union (EU) needed state aid to stay afloat. After years of bailing out failing banks with public money, which led to high public debt levels across the EU, the European Commission introduced the bail-in approach. This approach required stress tests and asset quality reviews (AQR) to identify capital shortfalls in the various banking systems. The idea was to review the quality of banks’ assets, including the collateral valuations and the adequacy of assets and other collateral provisions. This study focuses on the case of Slovenia, the first EU member state that applied a bail-in approach even before it became a legally binding law at the EU level. The Slovenian bail-in led to the cancellation of all subordinated obligations (shares or bonds) held by thousands of investors, mainly private individuals. The information asymmetry and data confidentiality argument together with the applied assumptions in AQR and stress tests have raised questions about the reliability and credibility of the national and EU authorities in this respect. This paper focuses on the social/human dimension of this case by presenting the current situation through the lens of the temporal dimension of former investors’ plight in their legal attempts to challenge those extraordinary measures. The paper revolves around data confidentiality and other issues that have contributed to the fact that this situation remains unresolved, more than ten years after the nationalisation measures. The finding of this analysis is that former investors have had no legal means to effectively challenge nationalisation measures because the authorities in Slovenia have failed to provide an appropriate tool that would be effective and available in practice.

THE LATEST ASPECT OF ASSESSING THE LEVEL OF CURRENCY SECURITY OF UKRAINE

The level of currency exchange security is an important indicator of the effective functioning of the currency exchange market. An imbalance in the domestic currency exchange market intensifies financial instability and makes it impossible to maintain an adequate level of currency security. The purpose of the research is to estimate the level of currency security of Ukraine in the conditions of currency market imbalance to determine the main reasons for its inadequate level and to make proposals for improving the methodology of calculation of the integral index of currency security.The article offers the author's interpretation of the essence of the concept of "currency security". The integral index of currency security during 2008 - 2022 was calculated in accordance with the "Methodical recommendations for calculating the level of economic security of Ukraine" and recommendations were suggested for improving this methodology in order to improve the situation on the currency market.It was proved that certain indicators make an impact on the level of currency security of Ukraine: movement of capital, negative trade balance, sufficient level of international reserves, dollarization of the economy, and high level of public debt. Ways to ensure an adequate level of currency security were proposed. Macroeconomic indicators that can act as indicators of currency security are considered and the correlation between them and the level of currency security was investigated. The expediency of introducing an additional indicator for the integral assessment of currency security is substantiated: the ratio of state and state-guaranteed debt to GDP. It allows to calculate the level of currency security more reliably. It is well-founded that the proposed indicator has a close stochastic connection with the exchange rate, therefore, if it is used with existing indicators of currency security calculation, it allows to detect negative trends of decreasing of the level of currency security.

Assessing financial stability in Southeast Europe (SEE): An econometric perspective

In the last decade, the global financial landscape, including Southeast Europe's eleven diverse economies, has been significantly impacted by multiple financial crises. These crises have led to economic downturns, unemployment spikes, and unstable financial structures. This study investigates financial stability and risks in Southeast Europe from 2012 to 2021, focusing on Albania, Bosnia and Herzegovina, Bulgaria, Cyprus, Montenegro, Greece, Croatia, North Macedonia, Kosovo, Serbia, and Turkey. It aims to identify factors influencing financial stability amid distinct economic challenges posed by global crises. Utilizing the Financial Stability Index (FSI) as the dependent variable, alongside the Banking Stability Index (BSI), inflation rate, GDP, and public debt as independent variables, the research employs data from the World Bank and The Global Economy. Analysis through STATA software and methods like OLS, OLSR, FE, RE, and GMM reveals the critical role of banking in financial stability, with a robust BSI positively impacting it, while inflation poses additional risks. The study advises Southeast European policymakers to prioritize banking stability and economic growth to enhance financial stability, while also managing inflation and public debt to reduce future financial risks. Our findings suggest that a one-unit increase in the BSI is associated with a 3.35-unit increase in the FSI, highlighting the banking sectors significant influence on regional financial stability. High public debt levels, conversely, are found to correspond with reduced financial stability, with a strong negative correlation of -0.634 between FSI and public debt. These findings underscore the importance of robust banking systems and sound fiscal policies in maintaining financial stability in the face of economic adversities.

Public Debt and It’s Impact on Bank Behaviour and Financial Efficiency: Ghana in Perspective

This study explored the impact of public debt on bank behaviour and financial efficiency in Ghana amid rising global and national debt levels exacerbated by the COVID-19 pandemic’s economic repercussions. An exploratory research design employing a quantitative approach was used to analyze the perceptions of 201 banking professionals across Ghana. The study utilized cluster and purposive sampling techniques to ensure a representative sample. Data were collected on banks’ risk-averse behaviour, credit availability, interest rates, and investment decisions in relation to public debt levels, using survey instruments and regression analysis to quantify the impacts. The findings reveal significant concerns among banking professionals regarding the influence of high public debt on conservative lending practices, increased interest rates, reduced credit availability, and adverse effects on banks’ profitability and the financial system’s stability. Regression analysis confirmed a negative relationship between public debt and financial efficiency, indicating that rising public debt levels may hinder the sector’s operational effectiveness. These results underscore the critical need for strategic fiscal management to mitigate the risks associated with high public debt levels on financial stability and development. Policymakers and financial institutions are urged to consider measures that promote financial sector efficiency and sustainable debt levels, including fiscal consolidation strategies, diversification of investment portfolios, and enhancement of risk assessment models. This study contributes to the empirical discourse on the effects of public debt on financial development by providing insights specific to the Ghanaian context, which has been relatively underexplored.

Torn between two debt types? The role of managerial ability in a firmʼs choice between bank loans and public debt

Motivated by the theoretical literature on firms' choice between bank loans and public debt, this paper analyzes whether more able managers choose a higher fraction of public debt. We find that firms with more able managers choose a higher level of public debt. We also find that the use of public debt by more able managers is positively associated with wealth creation for shareholders and negatively associated with bankruptcy risk. Our cross-sectional analyses suggest that this baseline relationship is conditional on a better information environment. We address endogeneity issues in multiple ways and run an extensive array of robustness checks. Overall, our findings are consistent with the prediction that managerial ability mitigates the information monopoly of banks.

The State as a Financial Market Participant

High levels of public debt and chronic budget deficits force states to be constantly present on the financial market. This leads to the slow transformation from tax states into debt states. The change in the financial operating model generates new risks, the essence of which the literature has yet to fully identify. Increasingly, states are beginning to resemble intergenerational financial institutions, allocating funds from future generations to those currently living. The aim of this article is to identify the risks to socio-economic sustainability posed by the critical dependence of the state on market-based financing of its borrowing needs. This is a first step in the search for a new security architecture that better serves the idea of sustainable finance.

Negative effects of high public debt on health systems facing pandemic crisis: Lessons from COVID-19 in Europe to prepare for future emergencies

<p>The investigation goal here was to analyze how the level of public debt affects preparedness of health systems to face emergencies. In particular, this study examined the negative effects of high public debt on health systems of European countries in the presence of the COVID-19 pandemic crisis. Empirical evidence revealed that European countries with a lower level of government debt as a percentage of GDP both in 2009 and 2019 (the period before the arrival of the pandemic) had lower COVID-19 fatality rates compared to countries with higher levels of public debt. The explanation is that high levels of public debt in countries trigger budget constraints that limit their ability to allocate resources to healthcare systems (e.g., health expenditures and investments), weakening health system performance and causing systemic vulnerability and lower preparedness during emergencies, such as with the COVID-19 pandemic. Implications of health policies are suggested to improve strategies of crisis management.</p>

The role of public-private partnership in overcoming poverty in the Kyrgyz Republic

Kyrgyzstan has been experiencing an “infrastructure deficit” for many years. It is expressed in the deplorable condition of roads, hospitals, schools, kindergartens, administrative buildings and other infrastructure facilities. One of the indicators of infrastructure quality is the global competitiveness index of countries. Among 133 countries of the world, Kyrgyzstan ranks 112th in terms of the quality of infrastructure in general. That is, it is included in the 30 countries of the world with the worst quality of infrastructure. This once again shows the country’s need for renewal, modernization and construction of new infrastructure facilities. For many years, the country has resorted to borrowing money from international creditors when it was necessary to build or repair existing infrastructure. As a result, about 90% of all Kyrgyzstan’s external loans today are debts for the construction of roads and energy facilities. However, the country can no longer follow this path today. Thus, at the end of 2021, Kyrgyzstan’s public debt amounted to $5 billion 147.22 million, or 60.33% of GDP. The high level of public debt and the recommendation of international institutions to refrain from increasing it led to the search for new instruments to finance new construction and modernization of existing socially important facilities. The mechanism of public-private partnership has become such a tool for the Kyrgyz Republic.

The macroeconomics of establishing a basic income grant in South Africa

AbstractThis paper quantifies the effect of fiscal transfers on the trade‐off between social relief and debt accumulation and discusses the economic growth and fiscal implications of different combinations of expanded social support and funding choices. Given South Africa's already high level of public debt, the opportunity to fund a basic income grant through higher debt is limited. Using a general equilibrium model, the paper shows that extending the social relief of distress grant could be fiscally feasible provided taxes rise to fund such a programme. Implementing such a policy would, however, have a contractionary impact on the economy. A larger basic income grant (even at the level of the food poverty line) would threaten fiscal sustainability as it would require large tax increases that would crowd‐out consumption and investment. The model results show that sustainably expanding social transfers requires structurally higher growth, which necessitates growth‐enhancing reforms that crowd‐in the private sector through, for example, relieving the energy constraint, increasing government infrastructure investment and expanding employment programmes.

Analyzing the Relationship Between Public Debt and Poverty Reduction in Developing Countries: An Empirical Study

Purpose: The goal of this current research is to investigate the link between public debt and poverty reduction in developing countries. The study aims to examine the influence of public debt on poverty reduction while considering other contributing factors such as economic growth, population, inflation, human development index, and institutional quality. Theoretical framework: The theoretical framework of this research on the impact of public debt on poverty reduction in developing countries is grounded in two key theories: Debt Overhang Theory and Fiscal Space and Poverty Reduction theories. The first theory posits that high levels of public debt can lead to negative consequences for economic growth and poverty reduction. The second theory emphasizes the importance of fiscal space in poverty reduction efforts. Fiscal space refers to the financial resources available for a government to fund public goods and services without jeopardizing debt sustainability. Method/design/approach: In this research, a panel data approach is utilized to investigate the correlation between public debt and poverty reduction in developing countries. The panel dataset encompasses a 21-year period, from 2000 to 2021, and includes data from 20 developing countries. Results and conclusion: The study shows that public debt has a significant and positive correlation with poverty, indicating that high levels of public debt can lead to an increase in poverty in developing countries. Research implications: Because high levels of public debt can lead to an increase in poverty in developing countries, countries need to exercise caution when taking on debt and prioritize debt sustainability to avoid negative effects on poverty levels. In contrast, economic growth and human development have a significant and negative correlation with poverty, suggesting that these factors can contribute to poverty reduction in developing countries. Originality/value: The analysis highlights the complex relationship between public debt and poverty reduction in developing countries. Although the results are mixed, they emphasize the need for policymakers to adopt a comprehensive approach to poverty reduction that addresses not only reducing public debt but also promoting economic growth, enhancing institutional quality, and addressing other poverty-contributing factors.

Fiscal Space and Policy Response to Financial Crises: Market Access and Deficit Concerns

Existing literature suggests that fiscal space matters for the policy response to financial crises. High public debt levels limit countries capacity to pursue macroeconomic and financial stabilization policies and resume growth after severe crisis downturns. We examine the involved channels through which fiscal space matters for the dynamics of fiscal policy after a financial distress, namely sovereign market access and policymakers’ views, in a panel of 30 OECD countries for the period 1980–2017. We introduce a non-linear measure of fiscal space, which further considers simultaneously both the debt-to-GDP ratio capturing long-term features of countries’ policy-making processes and budgetary balances that capture recent policy decisions and persistent fiscal deficits. We document a substantially strengthened role for sovereign market access constraints in driving the policy response to distress once fiscal space non-linearity is introduced in the model, which highlights the non-linearity involved in market participants’ concerns about fiscal space. Moreover, the vulnerability of market access concerning fiscal space is affected by either the debt-to-GDP ratio or fiscal balances dominating the assessment of fiscal space. The role of fiscal health and the policymakers’ views channel is more pronounced once flows of budget deficits are at the epicenter of the assessment of fiscal space, suggesting a “deficit concerns” channel.

Public debt and r-g risks in advanced economies: Eurozone versus stand-alone

Differentials between interest rates on government bonds (r) and economic growth rates (g) are a key determinant of public debt dynamics. What are the predictors of r-g, and what risks do policy-makers face? Applying regression methods to data on 22 OECD countries over 1970–2018 shows that higher public debt levels are not predictive of more unfavourable r-g in both Eurozone and stand-alone countries, where the latter issue debt in their own currency. The Euro Crisis – a period characterised by doubts over whether the ECB would backstop government bond markets – is linked with more unfavourable r-g, but only in Euro periphery countries. Our results suggest that the Eurozone’s institutional architecture affects r-g risks. While we find that predicted probabilities of future r – g < 0 are typically significantly higher than 50 % across OECD economies under conditions similar to the pre-Covid-19 years, r-g risks are most significant in the Euro periphery.

Fiscal Compliance and Fiscal Response to the COVID-19 Crisis in Visegrad and Baltic States

The coronavirus crisis, which began in 2020, had a major impact on the fiscal policies of the EU member states. Governments increased their spending to support economies affected by quarantine measures. Expenditure increase and revenue reduction made EU countries non-compliant with the requirements set by the Stability and Growth Pact, adopted to balance fiscal policies. However, countries were affected differently and used different fiscal measures. The paper discusses differences in fiscal response to the COVID-19 crisis among Baltic and Visegrad countries. The paper aims to analyse how the fiscal response in 2020 correlates with their fiscal indicator's compliance in the pre-crisis period (2004-2019). The results suggest that the states could be divided into two subgroups according to their fiscal stance before 2020 and their reactions to the shock. The first group, consisting of Hungary, Poland, and Slovakia, represent states with a higher level of public debt, lower compliance with the debt and deficit rules, and higher expenditures. Hungary stands out among the states, while Estonia and the Czech Republic have the best compliance scores.

The Interaction between Policy Mix in Lebanon: Applications of the Nonlinear and Linear ARDL Models

This study investigates the interaction between fiscal and monetary policies in Lebanon over the period 2001 to 2019 by using Autoregressive Distributed Lag (ARDL) and the Nonlinear Autoregressive Distributed Lag (NARDL) model introduced by Pesaran et al. (2001) and Shin et al. (2014) respectively in order to examine simultaneously the short- and long-run symmetric and possible asymmetric interactions between fiscal and monetary tools in Lebanon. The fiscal and monetary rules employed in this study are inspired from Leeper (1991, 2016 and 2018). Based on NARDL and ARDL fiscal and monetary reaction functions, Lebanese fiscal authority acts independently indicating a fiscal dominance. This situation obliged the BDL to neglect its main goal of maintaining price stability in order to support fiscal deficit by creating seigniorage revenue to balance the government accounts which in turns has led to an acceleration of inflation rates even in case of monetary contraction. The fiscal responsiveness to changes in public debt is extremely weak in Lebanon, and even is negative, and this is due to the high levels of public debt (174.3% of GDP in 2019). The empirical results indicate also that while the linear approach provides evidences of the interaction between the fiscal and monetary policies, the nonlinear approach provides more important evidences to determine in which direction this cooperation or conflict occurs between policy mix. Moreover, this paper provides new evidences of the absence of fiscal and monetary discipline rules followed by the fiscal and monetary authorities, which indicates that the policymakers in Lebanon were managing the financial and monetary policies without any specific plan or program and without any future vision or even a framework that allows these policies to be evaluated.

COVID‐19 and the economic recovery in South Asia: Economywide modeling scenarios for Bangladesh and Nepal

AbstractWe use economywide models to examine the economic recovery from COVID‐19 shocks in Bangladesh and Nepal during 2020–2026. Declining labor productivity, capital underutilization, consumption shifts, and international investment shocks had significant and differential sectoral and country‐level impacts in these countries. By 2026, GDP will be 6.9% and 13.9% lower in Bangladesh and Nepal, respectively, and the two countries will have an additional 3.3 million people in poverty compared to a no‐COVID baseline. Regaining economic and welfare losses will require substantial investments in key industrial, agricultural, and tourism sectors, although tough policy decisions will be required given high levels of public debt.

Non-linearities in the relationship between public debt and inequality

ABSTRACT This paper examines the possible nonlinear relationship between public debt and income inequality. The literature extensively examines the non-linear growth effects of public debt, whereas its inequality effects are not investigated sufficiently. Public debt can be used to finance distributive policies, thereby improving income equality. However, high public debt levels can also harm economic growth and decrease the fiscal space due to sustainability concerns, high risk premia, and large debt service burden. Hence, it is possible that public debt can have non-linear effects on inequality. The empirical analysis documents that the relationship between public debt and inequality is positive with a declining marginal effect in the case of advanced countries. However, developing countries display a U-shape relationship, implying that public debt is initially associated with declines in inequality, while higher levels of debt are associated with higher levels of inequality. The analysis also shows that the determinants of inequality can differ greatly between advanced and developing countries.

Javni dug Republike Srbije u novom milenijumu - analiza stanja i tendencije kretanja u budućnosti

The subject of research in the paper is focused on the analysis of public debt in the Republic of Serbia in the time interval from 2000 to the end of 2022. Observing the data on the movement of public debt in the new millennium, it is noticeable that there is a trend of its increase after the world economic crisis of 2008. The main cause of such trends is the excessive consumption of state authorities and the reduction of tax revenues, which is a consequence, first of all, of reduced economic activity due to global negative tendencies in certain years. The high level of public debt represents the main barrier for the economic development of the Republic of Serbia. Analysis of the data in the observed period indicates that the problem of public debt growth can be solved by increasing the gross domestic product and reducing public spending.

Доходы и расходы российских региональных бюджетов: анализ причинности по Грэнджеру

This paper investigated the causality between expenditures and revenues of consolidated regional budgets of 83 subjects of the Russian Federation in the period from 2002 to 2019. Based on panel data, the Granger‐causality test was implemented with the calculation of critical values using the bootstrapping procedure for each individual region. The analysis is based on indicating the direction of the relationship between expenditures and revenues of regional budgets in the context of four hypotheses: “tax-spend”, “spend-tax”, “fiscal synchronization” and “fiscal disunity”. It has been shown that 25% of Russian regions fulfill the “tax-spend” hypothesis, 7% — “spend-tax” hypothesis, 47% — “fiscal synchronization” hypothesis, and 20% —“fiscal disunity” hypothesis. Regions in the “fiscal disunity” group are characterized by a high level of public debt, which for one‐third of them may create risks for their fiscal sustainability, and subsequently risks for the federal budget.

ФІСКАЛЬНА СТІЙКІСТЬ ЯК ЕЛЕМЕНТ НАЦІОНАЛЬНОЇ ЕКОНОМІЧНОЇ БЕЗПЕКИ В УМОВАХ ГЕОПОЛІТИЧНИХ РИЗИКІВ

Fiscal sustainability is crucial for the overall economic security of a country. It means the ability of the government to meet its financial obligations in the long run without relying on excessive borrowing and without resorting to inflationary policies. The purpose is to explore the key challenges to strengthening fiscal sustainability as an element of national economic security in the face of new geopolitical risks. Global economic crises, such as the 2008 financial crisis, the coronavirus pandemic, the war in Ukraine, crisis events in the banking sector in March 2023 can also affect fiscal sustainability. Economic crises can lead to a decline in demand for goods and services, lower tax revenues, and increased government spending on social programs such as unemployment benefits. This can lead to an increase in public debt and budget deficits. High levels of public debt also increase the risk that the government will default on its obligations, which could undermine investor confidence and increase borrowing costs. This can further exacerbate the problem of high public debt, as the government may have to devote even more resources to servicing this debt. According to the concept of "debt rejection" for developing countries, as a rule, there is a "lack of freedom" regarding the regulation of the debt level, although it is managed using the most modern methods. Identifying the determining factors for a specific country, highlighting the threshold of "rejection" of debt is a basic approach to debt management, in particular, its restructuring, determining an acceptable level of debt, using international lending to mitigate fiscal shocks and accelerate growth. To address the problem of high public debt, governments can implement measures such as spending cuts, raising revenues through taxation, or implementing structural reforms to improve economic growth. However, these measures can be difficult to implement as they may require difficult choices and sacrifices. Nevertheless, addressing high public debt is important for achieving fiscal sustainability and promoting national economic security.

Do higher public debt levels reduce economic growth?

AbstractWhile the effect of higher public debt levels on economic growth has received much attention, the literature partly points to contradictory results. This paper applies meta‐regression methods to 816 estimates from 47 primary studies. The unweighted mean of the reported results suggests that a 10 percentage points increase in public‐debt‐to‐GDP is associated with a decline in annual growth rates by 0.14 percentage points, with a 95% confidence interval from 0.09 to 0.19 percentage points. However, we cannot reject a zero effect after correcting for publication bias. Furthermore, the meta‐regression analysis shows that tackling endogeneity between public debt and growth leads to less adverse effects of public debt. In testing for nonlinear effects, our results do not point to a uniform public‐debt‐to‐GDP threshold beyond which growth slows. Threshold estimates are sensitive to data and econometric choices. These findings imply a lack of evidence of a consistently negative growth effect of higher public‐debt‐to‐GDP. The main policy implication is that there should be caution with regard to “one‐size‐fits‐all” fiscal policy prescriptions in dealing with higher public debt levels.