Download Diapositiva 1 - Working Group on Public Debt

DEBT INDICATORS
DEBT INDICATORS
Content
1. Introduction
2. Financial Indicators
3. Vulnerability Indicators
4. Sustainability Indicators
5. Final Consideration
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1.-Introduction
DEBT INDICATORS
Three groups of indicators
Liabilities’
performance
as market
variables
Risk of current
conditions’
impact on
debt status
Government’s
ability to
address future
contingencies
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1.-Introduction
DEBT INDICATORS
Aim of Work
Analyzing and describing the most accepted
vulnerability,
sustainability
and
financial
indicators, along with their implementation scope
within public debt management and auditing
policies.
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DEBT INDICATORS
2- Financial Indicators
Risk Classification
 Market risk
 Credit risk
 Reputation risk
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Market Risk
Most accepted indicators :
1. Interest Rates and Yield Curve
These are the gain measure for those who decide to
save. Capital markets provide an efficient mechanism to
transfer capital between economic agents.
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Market Risk
1. Position and Slope of the Yield Curve
Slope
Market
Expectations
Theory
Liquidity
Preferences
Theory
Market
Segmentation
Theory
Positive
Short-term rates Positive price
are expected to to liquidity
rise
Excessive
supply
regarding longterm demand
Negative
Short-term rates Negative price
are expected to (punishment)
decrease
to liquidity
Excessive
supply
regarding shortterm demand
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Market Risk
1. Position and Slope of the Yield Curve
Slope
Market
Expectations
Theory
Liquidity
Preferences
Theory
Market
Segmentation
Theory
Horizontal Short-term rates
are expected to
remain the same
Absence of
liquidity price
Equilibrium
between supply
and demand in all
terms
Concave
Positive price to
liquidity followed
by a negative
price to liquidity
Excess of supply
regarding midterm demand
Short-term rates
are expected to
rise and
subsequently
decrease
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Market Risk
2. Weighted Average Maturity and Duration
These statistics measure the average time in which
issuers must face debt’s service.
The weighted average maturity term possesses a
limited use because it only considers payment dates
of the principal, while the duration additionally takes
into account the interests payment dates.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Market Risk
3. Modified Duration
It is used to measure the risk of a bonus. It indicates
the impact on the bonuses’ prices resulting from
interest rates’ variations.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Market Risk
4. Standard Deviation
It indicates the average detachment between a data
set and its average value.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Market Risk
5. Risk-Adjusted Yield (RaR)
It indicates the way in which an expected interest
rate associated to an issue, could cover the expected
loss due to an increase in such interest rate.
This indicator shows the number of times that the
loss expectations surpass the expected earnings.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Market Risk
6. Amortization Profile
It is used for distributing on a timeline payments to
capital.
The main idea is creating a regular series of
amortizations intended to minimize the risk of
refinancing large portions of debt if unfavorable
market conditions arise.
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Market Risk
7. Risk Cost (CaR)
Together with the term and the amortization profile,
CaR is used for risk-management purposes in a debt
portfolio.
This indicator allows assessing the cost-related
consequences
resulting
from
different
issue
strategies.
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Credit Risk
CONCEPT
The potential loss resulting from noncompliance of a
party in a financial transaction, or noncompliance with the
terms and conditions of a transaction.
It is conceived as the weakening of a party’s credit
quality, or the weakening of an originally agreed
guarantee or collateral.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Credit Risk
1. Credit default Swap (CDS)
CDS provide an insurance against bankruptcy risk
from any entity used as reference .
The seller of the protection is obliged to purchase the
referred bonus at its par value in case of a credit
event.
The purchaser periodically makes payments to the
seller during the term of the contract or until a credit
event occurs, whatever happens first.
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Reputation Risk
CONCEPT
Reputation Risk refers to losses resulting from untaken
financing opportunities, due to issuer’s bad reputation
resulting from failure in payment or from a damaged fiscal
situation.
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2- Financial Indicators
DEBT INDICATORS
Risk Classification
Reputation Risk
1. Credit Ratings
This indicators represents the private
perception of a country’s debt situation.

agents’
Rating Agencies
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Reputation Risk
2 A. Country Risk Indicators
They measure the degree of risk operating within a
country for foreign investments.
Investors seek for earnings’ maximization and take
risk into consideration, i. e., the possibility of less than
expected earnings, or loss occurrence.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Reputation Risk
2 B. Country-Risk Indicators
The country-risk index equals the over-rate that a
country pays for its bonuses related to the rate paid
by the Treasury of the United States.
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DEBT INDICATORS
Risk Classification
2- Financial Indicators
Reputation Risk
2 C. Country-Risk Indicators
The more damaged the country-risk rating is, the
larger it will be the cost of debt, and the lesser
economic policies can be handled; hence, the risk of
noncompliance will be bigger.
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DEBT INDICATORS
3.- Vulnerability Indicators
The 90´s
Monetary crisis
effects
Emerging market
economies
Main issue of economic policy:
Analysis and research on fiscal
vulnerabilities and their link to debt.
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3.- Vulnerability Indicators
DEBT INDICATORS
Emerging market
economies
•
They are vulnerable to variation of
investors’ attitude
•
Special attention was placed on
this group of countries and their
vulnerability assessment work
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3.- Vulnerability Indicators
DEBT INDICATORS
Vulnerability analysis
•
Data’s quality and transparency
•
Availability of timely and detailed data on
international stocks, external debt and capital flows
•
Definition of critical values
•
Conduction of strain tests
•
Applying early-warning system models
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3.- Vulnerability indicators
DEBT INDICATORS
Vulnerability analysis
Vulnerability indicators encompass:
•
Public sector
•
Financial sector
•
Households
•
Enterprises
When economies are under strain, one sector’s
problems spread to others.
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3.- Vulnerability indicators
DEBT INDICATORS
Vulnerability analysis
These are useful indicators to define debt’s evolution
and payment capability.
They offer certain signals about the worsening or
improvement of the government’s position.
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions
and governments and the academic sector:
1. Debt’s balance / domestic budgetary revenue
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions
and governments and the academic sector:
2. Debt’s service / domestic budgetary revenue
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions
and governments and the academic sector:
3. Current value / domestic budgetary revenue
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3.- Vulnerability indicators
DEBT INDICATORS
Vulnerability analysis
Most accepted indicators by international institutions
and governments and the academic sector:
4. Interests / GDP
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions
and governments and the academic sector:
5. Interests / domestic budgetary revenue
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3.- Vulnerability indicators
DEBT INDICATORS
Vulnerability analysis
Frequently used indicators in a cross-cutting way with
the aforementioned :
6. Foreign debt / exports
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability indicators
Frequently used indicators in a cross-cutting way with
the aforementioned :
7. Net International reserves / foreign debt
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DEBT INDICATORS
3.- Vulnerability indicators
Vulnerability analysis
Frequently used indicators in a cross-cutting way with
the aforementioned :
8. • Amortization / external debt disbursements
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3.- Vulnerability indicators
DEBT INDICATORS
Minimal suggested levels for emerging countries, provided by
two different international organizations.
Minimal Suggested Levels
Vulnerability
Indicator
International Debt
Relief *
International
Monetary Fund**
Debt Service
/income
28%-63%
25%-35%
Debt VP
/income
88%-127%
200%-300%
Interest/income
4.6%-6.8%
7%-10%
Debt/GDP
20%-25%
25%-30%
Debt/Income
92%-167%
90%-150%
* Debt Relief International: “Key Aspects of Debt Sustainability Analysis”, 2007
** International Monetary Fund, Foreign Affairs Department: Technical Note “Vulnerability
Indicators”, April 30, 2003 and several research documents.
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4.- Sustainability indicators
DEBT INDICATORS
Fiscal sustainability indicators
Public debt and the corresponding interest payment
became a structural problem in countries showing
persistent deficits.
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4.- Sustainability indicators
DEBT INDICATORS
Fiscal sustainability indicators
Fiscal sustainability indicators seek to describe public
finances’ inter-temporal aspects, based on year-to-year
available information.
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4.- Sustainability indicators
DEBT INDICATORS
Fiscal sustainability indicators
Systematic fiscal imbalances will mean future pressures
concerning interest expenditure, which will in turn
contribute to new debt accumulation.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
1 A. Fiscal Consistency Indicator
It takes into consideration the consistency of the
current tax policy, while keeping the debt-to-GDP
ratio constant.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
1 B. Fiscal Consistency Indicator
n
tn*  t 
g
n
 ( r  q ) d * t
where
tn* is the fiscal burden stabilizing, in a period of
(n) years, the debt-to-GDP ratio in level d*,
g being the expenditure
r being the interest rate, and
q being the GDP’s growth rate.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
2 A. Buiter’s Indicator
It calculates the gap between the sustainable
primary balance and the primary effective balance.
The sustainability condition is defined starting from
a wider net wealth concept than the one implicit in
the ratio debt / GDP.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
2 B. Buiter’s Indicator
b*  bt  (r  q) wt  bt
where
b* is the ratio debt / sustainable GDP,
b is the ratio debt / GDP,
wt is the net / real government wealth value as a
GDP proportion,
r is the interest rate, and
q is the GDP increase rate.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
2 C. Buiter’s Indicator
A tax policy is defined as sustainable by this indicator if
the net government wealth is kept steady, in a ex-ante
sense.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
3 A. Short-term primary gap indicator
It provides the primary balance level needed to
stabilize debt as a proportion of the GDP.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
3 B. Short-term primary gap indicator
BP *  BP  (rt  nt )b  BP
where
BP* is the primary balance needed to stabilize
debt,
BP is the prevailing primary balance
r
the real interest rate trend
n
is the population growth’s rate, and
b
is the ratio debt / GDP.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
3 C. Short-term primary gap indicator
If the permanent primary balance exceeds the
current primary balance, the primary path is
positive. This means that the fiscal policy is not
sustainable.
On the contrary, when the permanent primary
balance is lower than the current primary
balance, the fiscal policy tends to reduce the debt
level regarding the GDP.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
4 A. Macro-adjusted primary deficit
This indicator was created due to the high volatility
of macroeconomic variables, which leads deficit in
a specific moment to be different from the one that
would appear within normal macroeconomic
conditions.
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4.- Sustainability indicators
DEBT INDICATORS
Main indicators
4 B. Macro-adjusted primary shortage
I
M
t
(r  g )

bt 1  dtM
1 g
where
r
is the real interest rate,
g
represents the analyzed year’s real growth
d tM
is the primary macro-adjusted balance
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
4 C. Macro-adjusted primary shortage
The inconvenience of this indicator lies within the
need of establishing what a “normal economy
condition” is.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
5 A. Sustainable fiscal position indicator
It considers a historical methodology which
explicitly assess the tax authority reaction in face of
changes in those variables defining debt’s
sustainability in time.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
5 B. Sustainable fiscal position indicator
I
PFS
t
1  rt BPt  BP *
 (  t  t ) 

1  gt
bt 1  b*
where
β is the relation between the real
interest rate (r) and the GDP’s growth rate (g)
λ
is the function of fiscal policy’s reaction,
defined as the ratio between the primary
effective balance gap (BP) related to the
primary sustainable balance or goal (BP*),
and the current gap between the ratio debt /
GDP from the last period (b) respect to the
ratio debt / sustainable GDP or goal (b*).
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
5 C. Sustainable fiscal position indicator
If the ratio debt / GDP of the last period is higher
than the goal, it will converge to b* if, and only if
| βt - λt | <1.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
5 D. Sustainable fiscal position indicator
In static terms, an indicator value superior or
equal to 1, is an evidence that the fiscal
authority maintains an inconsistent fiscal
policy with the convergence of the ratio
debt/sustainable GDP levels.
An indicator value minor than 1 indicates that the
fiscal position is consistent with the conditions
required to ensure sustainability.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 A. Currency availability indicator
The initial assumption is that volatility of capital
flows’ variables is higher than that of
macroeconomic variables.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 B. Currency availability indicator
This indicator compares the proportion of
external debt related to internal debt with the
proportion of tradable goods related to the nontradable goods in economy:
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 C. Currency availability indicator
where
b
B
e
B*
y
y*
B  eB *
(a )
b
y  ey *
is the ratio debt / GDP,
is the debt in terms of non-tradable goods,
is the type of real exchange,
is the debt in terms of tradable goods,
the GDP of non-tradable goods, and
the GDP of tradable goods.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 D. Currency availability indicator
When
B
y
eB *  1
(b)
ey *
The debt’s composition and the production are
perfectly consistent.
When this condition occurs, the variations in the
exchange rate have no effects in fiscal sustainability
holding the ratio debt / constant GDP.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 E. Currency availability indicator
When the value is closer to 0 instead of 1, the
fiscal position becomes highly sensitive to
variations of the real exchange rate.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
6 F.
Currency availability indicator
Thus, to estimate indicator (a) it is necessary
to determine (b) and, therefore, the indicator to
be estimated is:
B
y
eB *  I
(0  I  1)
ey *
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
7 A. Fiscal Sustainability Indicators with Long-Term
Restrictions
Debt and fiscal sustainability indicators fail when
no long-term budgetary restrictions are
represented by them.
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4.- Sustainability Indicators
DEBT INDICATORS
Main indicators
7 B. Fiscal Sustainability Indicators with Long-Term
Restrictions
In order to try to cover these possible upcoming
events, Bagnai (2003) presents two indicators
consistent with these restrictions, in order to keep
debt sustainability.
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4.- Sustainability Indicators
DEBT INDICATORS
7 C. Indicators that consider the budgetary restrictions Bagnai, 2003. First case
In the mid- and
long-term,
generations from a
country will act as
a governmental
funding source
regarding debt
(financial markets)
and tax payment
(macroeconomic).
Objetive
To keep the debt /
GDP ratio (B/y)
stable in time.
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DEBT INDICATORS
4.- Sustainability Indicators
7 D. Indicators that consider the budgetary restrictions Bagnai, 2003
Dynamic fiscal stability will be reached only when
the following two conditions are met:
B ~
  (1  n) 
 b  k
 n  r (1   )

y
1




(a)
  (1  n) s (1   ) 
  1   (1  s)  

0
r
(
1


)



(b)
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DEBT INDICATORS
4.- Sustainability Indicators
7 E. Indicators that consider the budgetary restrictions Bagnai, 2003
where
n

s
r



k

is the population growth rate,
is the income tax,
is the income proportion that is saved,
is the real tax rate
is the elasticity of savings related to the interest rate,
is the investment elasticity related to the interest rate,
is the elasticity of consumption related to income,
is the ratio capital GDP, and
is the elasticity of the product related to capital.
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4.- Sustainability Indicators
DEBT INDICATORS
7 F. Indicators that consider the budgetary restrictions Bagnai, 2003
~
If debt exceeds the b level, the economic system turns
dynamically unsustainable and debt will respond to
any exogenous shock, acquiring an explosive
trajectory.
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DEBT INDICATORS
4.- Sustainability Indicators
7 G. Indicators that consider the budgetary restrictions Bagnai, 2003. Second case
Inter-temporal
restrictions
The equilibrium’s
steadiness depends on
the provisions regulating
fiscal and monetary
policies
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DEBT INDICATORS
4.- Sustainability Indicators
7 H. Indicators that consider the budgetary restrictions Bagnai, 2003. Second case
When a monetization coefficient is zero and public
expenditure endogenously vary with the strengthening
of debt, then the necessary condition to achieve a
dynamic equilibrium is the following:
  r (1   )w   (1   ) 
L 

B

y
 0 (a)


L1 y 
r
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4.- Sustainability Indicators
DEBT INDICATORS
7 I. Indicators that consider the budgetary restrictions Bagnai, 2003. Second case
Formula:
  r (1   )w   (1   ) 
L 

B

y
0


L1 y 
r
where
y is GDP,
 is the income proportion by the total income
capital,
L represents currency,
L1 is the first derivate of the former variable
respect to the real interest rate, and
w is the wealth as a proportion of the GDP.
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4.- Sustainability Indicators
DEBT INDICATORS
7 J. Indicators that consider the budgetary restrictions Bagnai, 2003. Second case
Public debt balance in real terms B
 


 rw       

B
1


 b*   


y
r




where elasticity of money’s demand related to the
interest rate

(1   ) L1r
L
0
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DEBT INDICATORS
4.- Sustainability Indicators
7 K. Indicators that consider the budgetary restrictions Bagnai, 2003. Second case
When an expansive fiscal policy is funded through
deficit, the interest rate needs to be increased in order
to induce the economic agent to reallocate its balance
portfolio to the new debt.
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5.- Final consideration
DEBT INDICATORS
These three main indicators groups:



financial
vulnerability
sustainability
aim understanding the public debt phenomena from
different angles,
with the objective of
allowing
governments to control and manage public debt based
on sound credit practices.
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