Datos referidos a los parados con relación a la formación.

Refinancing risk is a risk that debt will have to be rolled over at an unusually high cost or, in extreme cases, cannot be rolled over at all. For countries that have unimpeded access to capital markets refinancing risk is a risk that government need to pay higher interest rates at a moment of next loan issue. For countries with difficult access to capital markets this notion primarily relates to the likelihood that public debt may be difficult or even impossible to refinance because of too high costs or too short maturities of the loans available.

Generally, as the level of accumulated government debt over time increases, probability that government could not be able to pay it rises and consequently investors require higher risk premium for new debt issues. However, as there is no straightforward relationship between level of debt and required risk premium, it is very complicated to execute analysis similar to Hicks sensitivity, i.e. to compute change in cost of borrowing with respect to change in debt level without engaging complex econometrical models. Thus, in practice Debt Management Offices usually use set of indicators which provide more qualitative insight in possible issues with debt rollover. Classical refinancing risk indicators in debt management comprise Average Time to Maturity, redemption profile and residual maturity.

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Average Time to Maturity

Average Time to Maturity (ATM), gives information on the length of the debt’s life, i.e. average residual maturity. It is the simple for calculation, as it takes into account only time to maturity and principles of each debt instrument. ATM for the portfolio is calculated according to the same mathematical formula as for the ATR,

𝐴𝑇𝑀 = ∑𝑇𝑡=1𝑡𝐹𝑡 ∑𝑇𝑡=1𝐹𝑡

(2.72)

where t is a time of residual maturity of debt instrument while 𝐹_𝑡 is principal value of the debt instrument which matures at the time t.

It is obvious that although ATM is just natural extension of duration and ATR. However, it is usually considered in financial literature as refinancing or rollover risk indicator as because it takes into account in full the residual maturity of floating rate debt.

Redemption profile

The redemption profile is graphical indicator which shows distribution of the payment of debt portfolio across the time. Idea that lies behind is very simple: wherever large amounts of debt to be paid are concentrated at certain point in time, government face possible issues with debt refinancing and increase in cost of new dent issue. Basic calculation of redemption profile could be extended to the sub-portfolio levels, i.e. it can show also redemption profile structure in regard to currency or interest rate structure.

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3 THEORETICAL AND METHODOLOGICAL FRAMEWORK OF

FISCAL SUSTAINABILITY ANALYSIS

A term “fiscal sustainability” is colloquially used to describe a situation wherein the public finances appear to be in a condition which does not indicate, ceteris paribus, concerns about keeping fiscal and macroeconomic stability over a longer period of time. While intuition behind notion of the fiscal sustainability is clear, analysis of the fiscal sustainability requires more rigorous conceptual definition and subsequent operationalization of the methodology. Table 3.1 summarized several definitions of the fiscal sustainability from the existing literature:

Table 3.1: Summary of fiscal sustainability definitions

Source and publication Definition

European Commission (2019) European Semester Thematic Factsheet: Sustainability Of Public Finances

The sustainability of public finances, also referred to as fiscal sustainability, is the ability of a government to sustain its current spending, tax and other- related policies in the long run without threatening its solvency or

defaulting on some of its liabilities or promised expenditures. European Commission (2018)

Fiscal Sustainability Report 2018

Generally speaking, fiscal (or debt) sustainability is broadly understood as the ability of a government to service its debt at any point in time

IMF (2014)

Fiscal and Debt Sustainability

The government is able to achieve a fiscal stance that allows it to service public debt in the short, medium and long run

 without debt default or renegotiation:

 without the need to undertake policy adjustments that are

implausible from an economic or political standpoint;

 given financing costs and conditions it faces.

IMF (2011)

Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis.

The fiscal policy stance can be regarded as unsustainable if, in the absence of adjustment, sooner or later the government would not be able to service its debt

Adams et al. (2010) Fiscal Sustainability in Developing Asia

Fiscal sustainability is the state wherein the government budget can be smoothly financed without generating explosive increases in pubic debt (or money supply) over time.

Akyüz (2007) Debt Sustainability in Emerging Markets: A Critical Appraisal

The concept of fiscal sustainability draws on the idea that public debt cannot keep on growing relative to national income because this would require governments to constantly increase taxes and reduce spending on goods and services.

As reads in the table, conceptual definitions proposed by the intergovernmental organizations or academic literature put a sustainability focus to ability of government to service its debt/liabilities without major correction of the fiscal policy stance. In more strict sense, concept of public debt sustainability can be considered as the first step in

72 operationalization of the fiscal sustainability concept: short-, mid- and long-term public debt sustainability is perceived as a necessary and sufficient condition to claim fiscal sustainability, too. Hence, terms “public debt sustainability” and “fiscal sustainability” are often used interchangeably, as I do in this work.

In the section on debt sensitivity analysis, it was discussed that “perfect” methodological approach to debt sustainability assessment should reflect not only possible development of the debt dynamics over time, but also risks associated with different scenarios and shocks occurrence. Also, operationalization of the methodology for debt sustainability assessment is conditional on the purpose: while macroeconomic and fiscal authorities are more interested in assessing level of debt dynamics with an objective to actively manage fiscal policy, DMO is more interested in assessing debt servicing costs over time with an objective to optimize cost-risk trade-off. This two analytical flows are schematically presented in Figure 3.1.

Figure 3.1: Scheme of analytical flows in fiscal sustainability assessment

Source: author

The previous scheme illustrates how public debt analytical framework is used in practice to generate policy decisions that in the long run will preserve debt sustainability. The government institutions in charge for macroeconomic and fiscal policy produces the

73 baseline macroeconomic scenario with associated assumptions, that is aligned with medium-term fiscal framework, national budget and other mid- and long- term strategic documents on economic and fiscal policies. On the other side, DMO provides relevant input information on existing debt structure (type of instruments, currency, interest and term structure) and information on yields and rates on the level of individual instruments. These two types of inputs are combined to perform cost-risk analysis of public debt. Cost- risk analysis provides the most generic public debt analytical framework, as debt sensitivity analysis can be thought of as a special case of cost-risk analysis. Debt sensitivity analysis is combined with fiscal reaction analytics to produce optimal decision on the fiscal policy stance. In similar manner, DMO uses cost-risk analysis for cost-risk trade-off optimization, to produce debt management strategy that meets main objective of the public debt management defined as “ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.”16 Eventually, envisaged long-term outcome of the both analytical outputs is debt/fiscal sustainability, such as defined in the Table 3.1. Since the focus of this work is on the fiscal side of the debt management process, this chapter is organized in three sections following right-hand side of the Figure 3.1. First section presents the basic principles of the public debt cost-risk modeling. Second section deals with particular issues of debt sustainability assessment. Third section discusses fiscal reaction function as an important segment of the fiscal policy making.