Identifying Countries at Risk of Fiscal Crisis: High-Debt Developed Countries

Christos Shiamptanis Betty C. Daniel ()
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Christos Shiamptanis Betty C. Daniel: Wilfrid Laurier University, https://sites.google.com/site/cshiamptanis/

LCERPA Working Papers from Laurier Centre for Economic Research and Policy Analysis

Abstract: Crises in European countries in 2010 and beyond demonstrated that fiscal crises and sovereign default are not confined to emerging and developing countries. Advanced economies can sustain much larger debt-to-GDP ratios than emerging economies, but how much larger? Experience is heterogeneous both across countries and across time. What determines this heterogeneity? We show that a low growth-adjusted interest rate, a large maximum value for the primary surplus, and a strong surplus-responsiveness to debt can support higher debt-to-GDP ratios without fiscal crisis. We use our estimates to assess fiscal crisis risk for nine-high-debt developed countries following the financial crisis in 2008. Our results imply that Ireland and Portugal lost access to financial markets due to the rise in growth-adjusted interest rate, whereas Greece would have lost access regardless of the interest rate. Additionally, our results warn of potential future crises for Greece, Italy and Japan even if these countries remain in a low interest rate environment.

Keywords: Fiscal Limits; Fiscal Space; Fiscal Rules; Fiscal Solvency; Sovereign Default (search for similar items in EconPapers)
JEL-codes: E62 F34 (search for similar items in EconPapers)
Pages: 47
Date: 2019, Revised 2021
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Persistent link: https://EconPapers.repec.org/RePEc:wlu:lcerpa:bm0125

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