Global public finances: basic facts and numbers

April 18, 2014

The latest IMF fiscal monitor underscores progress in global fiscal consolidation. The structural government deficit in the developed world has been reduced by 1.2%-points to below 4% of GDP in 2013, while the public debt stock inched lower to 107% of GDP. Fiscal tightening is now becoming less aggressive in most countries, with the notable exception of Japan. Fiscal risks remain globally elevated though, due to low inflation, historically debt levels (view link here), and sizable unfunded pension liabilities.

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Tracking the history of sovereign defaults

March 8, 2014

Bank of Canada has assembled a new broad database on global public debt default. It shows that after sovereign delinquency had exceeded 5% of outstanding debt in the 1980s, it declined alongside falling interest rates to below 1% in the 2000s and has remained low despite the global financial and euro sovereign crises. In a longer (200 year) context sovereign default ratios have moved in long cycles, each stretching over several decades.

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Europe’s bank-sovereign nexus (revisited)

March 1, 2014

A Bank of Italy paper illustrates and explains the rise in European banks’ sovereign debt holding since the great financial crisis. It also reiterates structural causes for bank-sovereign feedback loops. One would conclude that this nexus remains an important factor for market dynamics and monetary policy.

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The impact of high public debt on economic growth

February 22, 2014

Academic work suggests that public debt above 90% of GDP is a drag for GDP growth. This would apply to the developed world today. However, a new IMF paper based on a broad panel of countries going back to 1875 qualifies this rule. It suggests that high debt does not per se reduce growth. Only if debt levels are both elevated and rising, growth tends to suffer. On its own high debt does often entail greater output volatility, however.

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Estimating China’s augmented fiscal debt and deficit

January 25, 2014

The IMF, like other institutions, estimates that China’s fiscal position is much weaker than suggested by headline statistics. A new paper sees the augmented fiscal debt at around to 45% of GDP and the augmented fiscal deficit at close to 10% of GDP. Financial stability risks arise from dependence on a favorable ratio of growth to real interest rates, the reliance of local budgets on real estate sales, and the refinancing of local government financing vehicles’ debt.

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Excessive public debt and financial repression

January 2, 2014

The central government debt ratio in the advanced economies has reached a 200-year high watermark. Other levels of government debt, unfunded pension and health care liabilities, and a huge external debt stocks add to scale and complexity of the problem. A historical analysis of Carmen Reinhart and Kenneth Rogoff suggests that developed countries, like emerging markets, are prone to taking recourse to aggressive financial repression and even debt restructuring.

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How to reduce excessive public debt

November 25, 2013

An empirical IMF paper suggests that public debt reduction can support medium-term growth, if it is focused on cuts in non-investment spending. Such benign fiscal consolidation is less likely, however, when the private sector is credit constrained and fails to benefit from lower public borrowing, as has been the case after the 2008 financial crisis. In this case more balanced and gradual fiscal adjustment may be required to mitigate the negative growth effect.

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A theory of safe asset shortage

October 21, 2013

Ricardo Caballero and Emmanuel Farhi from MIT and Harvard propose an interesting and relevant formal model of safe asset shortage. While safe asset supply is constrained by the fiscal capacity of sovereigns and financial innovation, demand may be in a secular ascent (driven for example by collateralization and population aging). The resulting shortfall can result in a structural drag on economic growth and impair the effectiveness of fiscal and monetary policies, with some resemblance to the Keynesian liquidity trap.

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The world’s fiscal outlook

October 11, 2013

The IMF projects that 2013 will see a big reduction in the developed world’s fiscal deficit by roughly 1.5%-points to 4.5% of GDP. By now the majority of highly-indebt countries seems to have achieved about two-thirds of the required post-crisis fiscal consolidation. The advanced countries’ public debt stock remains elevated at 109% of GDP, however, leaving the world vulnerable to higher interest rates and sovereign solvency risks.

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The systemic risk of China’s local government debt

September 28, 2013

A Nomura research report suggests that China’s local government financing vehicles now pose a major risk for the economy. Their debt stock has surged close to 40% of GDP over the past three years. Profitability is poor, liquidity risks are high, and solvency hinges on government support.

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