Presentation by Agnès Bénassy-Quéré, Professor, University Paris 1 Panthéon-Sorbonne and Paris School of Economics
Conference on:
“Sovereign Debt Crises: Prevention and Management"
Rome, 10 December 2018
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
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.
9. 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.