Goal: Organize as many articles. Schedule: 1 page atleast a day.

Start combing everything in this word window in the middle of next week. Then read everything, especially the structure part and everything below. Take time to organize and think how you will go about it. Review question and how close you are to it. Then start comparing, contrasting, critiquing and analyzing (synthesizing) by middle of next week.
(overall plan, take it in bits like uni..however we were given directions, here i have none, the scope is my own and i dont now even basis of the topic. So i red a good base article and could have been book too....then three parts, read as many articles as oble, try to arrange tem and critique them and all [start off with kind of review to get myself started actually on a new topic and on academic writing]. Along the way i need to decide scope, questions, issues etc., actually the main question/topic, smaler questions, issues shod have been defined earlier, but i m keeping it easy for myself and my later academic writing can be more specific...) This Can be first article, maybe like uni, start simple 3000 words, a review type of an article and then go on to do specific articles. In the article, for critical appraisal, use 3Cs and 1 J(ustify as well as being objective, your work isnt in a vaccum) (with a sceptical, suspicious stance, also taking an innovative way of solving a problem or looking at a question or preseing it etc, like martyn used to say) and (give your own thought into it and at the end make up a conclusion and your mind), and for style, --as its a review type article so go for 3W and 1 H, ask smaller questions, start broad and go simple etc (however should be uptodate and new). BUT we never did review type articles at Uni???!, we just did critiquing of different types on specific topics.... unless we/i do a literature review from which we DERIVE FURTHER QUETSIONS...so what should i do??..THINK In transitionary mode.. Also should you not read latest stuff, to know latest issues and then carry on?>? how culd you connect research theory and empeiricail IMF thing? Make outline. Remember Assumptions, premises. Explicit or implicit are limitations and cabln be used as

critiques...as can be other limitations.--Remember Know your audience and purpose of writing.(see organizing
research folder as well for some addons and tools)what about empirical and other kinds of evidences? Remember, tell why research is different, what it adds and uses n implications,, its limitations and future suggestions-See book on studies such as buylogy, business exposed or david fink or whatever what drives us (a book on motivation) and several others Big research, impatful suff, MIGHT be too OBVIOUS, or just the EXACT opporits ehwt apeopel think > shocking, like Drive whatmotivates us, the LSE guys book on Business in sights or buyology. Stanford PhD however is abouty interdisplinarystuff I think

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Below I have so much discussion with myself that they can literally be a series of questions, articles and reports. Do go through them again
Possible STRUCTURE and conclusion:

I am Planning to divide the article such that the main article will be based to look at ratios and all the things, and in the end i conclude that we require each factor it seems for different problem, different

time horizons even, maybe, as I believe. The conclusion is already there then we can see IMF framework, moodys frameworks etc What I mean is that I will use all the MAIN article information and expand on it and write a conclusion at the end , where I think that all these things, ratios and all, can be used to asses sustainability, however it seems some can give an earlier indication and we can then move on to other criteria to see it indepth. This point is also related to what I mean when I say, what factor is used depends ons on how on the verge the country is , how immediate the problem is. However what tools/criteria are used to assess and what they mean can also differ depends on the countrys structure, debt structure, economic structure etc e.g. as the main article has mentioned some ratios are good and some are not in certain situations. THIS IS MY CONSLUION FROM THAT (main article and other arguments I will put in there). We can then go on to compare and contrast the different frameworks being used. (but before tat maybe compare and contrast more theory than just main article) !!! Therefore comparing and contrasting theory and practical among themselves and between each other, pointing out what is right, wrong and what needs to be added!!!

Possible Question::::::::::::::Is Greeces debt sustainable or will it default? How to find out?
Disclaimer: Well actually, if this is the question then the answer will be different. As Greece is on the edge, its inflows and outflows are different. Inflows are dictated by EU, and its support programme and outflows also dictated by the austerity. No debt in market. It is better to understand what Greece went through recently and what it is going through especially with all the European support or whatever and also important to see who owns greek debt i.e. the banks and what is the origin of the debt. In any case my questions seems to be about recognizing debt sustainability in general and not Greece in specific (what was the original motivation, but that time it seems has gone..or is it??). See

also what greece is up to in terms of derivatives or deferred payments or other bubbles

but the question is when will a country default?? Can i buy high yield bonds, it coud be long term , as wlel as immediate. And might include more than just figures (but again, has the time for this question about a country being on the edge, gone? And should i just
So important to see how a countrys sustainability is assured, for now and in long run...

practice? Or should i actually answer this specific question...)

The uniqueness or contribution to literature that I might be able to bring is by demonstrating how to determine if a country will default or will survive a default depending on seeing how likely it will be RESCUSED which will be determined by donors, debtors, and/or IMF, WORLDBANK guidelines and maybe even short term special case objectives in extreme cases (Asian/European crisis), which might include reducing the impact of contagion i.e. i think how likely will the countrys insolvency impact other/global markets. What i really wanted, MAYBE, was at the end of the day to note if high yield bonds should be bought i.e. countries which are highly risky or even at the edge of chaos, will they be saved?? Will their bonds last?? Maybe IMF and others have to let go of usual clauses, rules, and paramaters, and if so, what are they?? (and say, after a haircut/bail in/bail out, will their economies last for us to invest in equities??, thats another question). OR the question can be, debt sustainability in crisis or something. Afterall, my motivation is about bond markets in crisis....DECIDE!!!

Also

> I think talking about debt is too general, maybe I should concentrate on government rather than external debt. The factors will differ sepending on the Structure of debt (private/public or external/internal), but i will keep it public debt, as it is easy. also because i found more on govetnent debt :) and what kind of economy (emerging, advanced) and at what stage of debt (good condition, in crisis etc) IT WILL ALL MATTER------BUT STILL UNSURE..DECIDE!!! > > Also, maybe my question should be determining (and even eventualy recommending) policy response of government , IMF donors etc to insolvency, illiquidty crisis (and the decisions made through negotiation or whatever like in cyprus/greece eg will there be haircut for private investore/bail in/bail out etc.)...DECIDE!!!. But then again, i need to invest in high yield bonds, not always countries in direct or terrible crisis...or do i?!!! DECIDE!!. Soverign default!! (by the way seems like different regions, even countries have different debt structure, debtors and agreements and economies and evaluation might differ for all e.g. Japanese local debt vs European debt vs emerging market debt etc (let alone internal/external and private/public debt), maybe i should focus further...better for me! Or should i just do a relatively general review of research (exploratory, like

reading a book on the topic) or critique one article/idea e.g. primary balance and debt etc, to begin with?!and then go ahead and do something proper article (maybe even do many smaller articles)!! Hummm....good idea. Decide in the break before going ahead). Maybe cirtrique IMF, like comparing literature with that...but maybe too much right now. I am practicing (eventually a review, then can be about countries in solvency and illiquidity and how they are saved or not and the impact on bond yieldsthe ultimate question i.e. in times of crisis , close to insolvency, illiquidity, what determines if debtors have to take a haircut or what happens to debtors in such of different situations e.g. haircut, rollover etc-the ultimate question).... How shoudl i
do it? A review looking analytically at the topics and arranging, like a review We never did that for assignments, we only cirtiqued, but then again, we actually had to, espeiclaly when looking at theory. Therefore this could be part of a bgger asignment. It would infact be excllent, followed by a crutiqe of IMF, or any other model I discover on teh way. It becomes a literature review...WOW!....UMAIR<<>>>>>>>>>Read below, above, see DECIDE!! And read Draft4 as well..Hey how baout theory and te see existing frameworks (IMF, world bank, moodys) and comprare and constrats framewrs and theory. I can even first just look say a critireu of itemepral budget constaint as criteria for sustable debt , it will st be like a 1 year paper and then icneases it to do what is mentioned.

Right now =For now, compare and critie theory! With main arctile , be careful to dissect your oprion, main arctile and new artrules. Get them from the greek dbet folder. You can d real frameworks later (IMF and moodys an all). See text file, more articles

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INrtoduction; Since the beginning of the financial crisis, several countries have come close to insolvency and illiquid. With massive pressures on budgets, due to excessive borrowing in the boom years, many countries had a difficult time raising finances (REFERENCE) (it can be due to excessive borrowing, irresponsible borrowing as as well as interconnected, complicated and complex borrowing, REFERENCE) Situation got veyr uncertain,e speiclaly in Eurooe,l with decisons fof EUropean ekladers and central banks seeme dto move the market (REFRENCE) Such situation presented investors with a difficult time, however savvy investors could have seen this as an opportunity to invest in high yield bonds. However for some countries, the risk seemed to great. If it woul be found out how likely a country is to actually default. ==== ============ ==============

START

Q1For time being, I am looking at how to look at debt sustainability Ultimately, debt sustainability in a crisis (close to insolvency or illieuqd country)

debt (private/public or external/internal), but i will keep it public debt, as it is easy. also because i found more on government debt :) and what kind of economy (emerging, advanced) and at what stage of debt (good consition, in crisis etc) IT WILL ALL MATTER------BUT STILL UNSURE..DECIDE!!! I think Public debt (internal and external, maybe), of advanced economies. >
-Introduction:

http://econweb.umd.edu/~mendoza/pp/w16782.pdf (working paper by IMF staff)

The authors look at whether there is any space for fiscal manoeuvring, what can be called fiscal space to note whether advanced economies require urgent fiscal adjustments to ensure debt sustainability. Due to the depression, the associated bailout, stimulus spending as well as lower revenues, the countries are now seeing the highest debt/GDP and primary deficit/DP ratios in over 40 years. They will require more financing in the future, as the it is doubtful whether the PIGS will be able to service etheir debts. Therefore it is to be seen if fiscal space exists or not.

IMF Working Paper IMF Institute Assessing Fiscal Sustainability: A Cross-Country Comparison Prepared by Enzo Croce and V. Hugo Juan-Ramnl July 2003 According to literature, fiscal sustainability refers future implications of present policies i.e. whether a government can continue inline with its budgetary polices without any threat to solvency. Therefore it is important for policy makers to know if fiscal policy is sustainable in order to determine weather policy correction is required or not. If the current fiscal policy leads a country away from solvency, the policy can be said to be unsustainable. Therefore a good basis to assess sustainability is to determine conditions for solvency are being met

How to Assess Public Debt Sustainability: Empirical Evidence for the Advanced European Countrieshttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdf
Borrowing is a desirable method to meet expenditures for governments with limited resources. However this only true if it is done with proper fiscal policy in place. Several economists have tried to investigate the issue of public debt sustainability since the concept of sound fiscal policy was brought into discussion by J.M. jeynes in 1923.

should this go in sustainability heading?? Public debt sustainability has been studied
extensively since years as misuse of borrowing can have severe consequences. Researchers have tried to investigate how high debt can rise without reaching fiscal insolvency. Unsustainable fiscal policies could deteriorate macroeconomic conditions of a country and make it more vulnerable during exogenous shocks. Huge public stocks and fiscal deficits can be detrimental to the welfare of a country, as it leads to an inefficient allocation of resources, huge public debt stock piles would impact future generation and it can also lead to inflation and volatility of inflation. In fact, any developed countries are now at a critical point in their fiscal policies, such as Greece which is why ensuring fiscal sustainability is critical. As public debt is expected to rise and might create concerns that it might reach unsustainable levels, exposing governments to risk of solvency and sovereign default, authors have address the current fiscal crisis and public debt sustainability has received a lot of attention. Many studies have been understand to estimate the impact of financial crisis on fiscal policies and investigate the OECD and EU countries governments reaction to increasing public debt. The aim of this paper is to enrich all these studies, by providing an overall analysis of the evolution of the public debt, among the most developed Debt Sustainability in Emerging

Markets: A Critical Appraisal-http://www.un.org/esa/desa/papers/2007/wp61_2007.pdf Many governments (author is discussing emerging markets) are not able to create primary surplus sufficient enough to stabilising public debt ratios. Deteriorating global financial condition might create problems for budgetary rtransger, retaing even bigger challenges for government debt management, as restructuring debt is usually more difficult for domestic than for external debt. http://www.tffs.org/pdf/edsg/edsgchap14.pdf seems like a chapter from some book

14. External Debt Sustainability Analysis 1 November 30, 2012

Debt is a natural consequence of economic activity. While some economic entities have more incomes than their requirements (consumption or investment), others do not. Through debt, both

entities are better able to realize their intertemporal consumption and output preference and therefore fuel growth. This debt creation is based on the premise that the debt contract will be adhered to by the debtor. However, if the debtors income is not sufficient and the assets too are too few to call upon, problems arise. In such an instance, or even when expecting such an instance, the value of debt creation coing from internal financial flows, cannot be realised by both the sides, which is why sound country level risk-managment procedures are necessary and it is important that the external debt is maintained at a level that is sustainable.

http://www.wiwi.unibielefeld.de/fileadmin/cemm/templates/downloads/wpaper/PaperEUDebt07022008.pdf The budget plan is very much effected by growing public debt. If the budget is not balance, deficits accumulate, creating piling public debts. Several European countries in the last 10 years have suffered from permanent and in pact high public debts, which has create serious economic and political problems for the members of EMU as well as to the stability and Growth Pact which has put in place limitations on fiscal policies. Due to the difference in sizes of the various countries in the Union, debt is expressed as a ratio of GDP, which is a measurement used in the convergence criteria of the Masstriccht Treat as well. It limits the public deficit to just 3% of GDP and public debt at 60%. A figure that in the early part of 2000s was regularly violated by countries such as France, Germany and Portugal.<<WE CAN USE THIS PART WHILE LOOKING AT RATIOS as well. But the issue is whether government can respond in a sustainable manner to growing persistent budget deficits and growing debt. Sustainability is workable wit indebt ness in the short run, however it requires that the present value of debt converge to zero aymptotically and this This raises the question of how governments react to higher debt levels, which options they have to respond and if these actions are still effective >>GOES ON TO SAY THAT THE LIETURARE HAS MANY OPTIONS TO NOTE Sustainability AND WE START WITH BLHA BLAH, GOOD TRANSTION THAT YOU CAN USE TOO, also see if discussion on sustainability should be put under the sustainability heading or somehow make a transition to that or what?

EXCELLENT STRATER ARTCILE---MUST READ WHOLE!!!!! A MUST (good see abstract from original if need idea) http://www.ecb.int/pub/pdf/other/art1_mb201204en _pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY IN
THE EURO AREA ABSTRACT parts, already in the introduction were cut out. However conclusion of the ABSTRACT is kept
ABSTRACTS/CONCLUSION TYPE--Therefore a more comprehensive course/method is needed to deal with debt sustainability with a more systematic and in depth assessment of country specific risks to sustainability and requires systematically watching a range of fiscal liability and imbalances of the private sector. (rather than ad hoc methods to monitor such risks). On top that, importance needs to be placed on accounting for fiscal and economic behaviour as a response to shocks. The current financial crisis has also proved that it is important to look at not only medium term risk debt sustainability, but also account for short term refinancing risks, emphasizing the needs for safety margins in public finance in normal times as well.

In order to limit the risk of debt sustainability, the Euro Area needs to bring government debt to GDP ratio below 60%. Already an excellent step towards more strict budgetary discipline in eth Euro area is the commitment to establish a fiscal pact which has a debt brake in the Treaty on Stability, Coordination and Government within the Economic and Monetary Union
1 INTRODUCTION (JOIN WITH ABOVE< WHERE YOU CAN, ABOVE IS ABSTRACT) Due to the global finance crisis, there has been a very quick build up of government debt in most euro area countries and therefore for the Euro Area. This shows, among several others things, decline of economic growth and working of automatic stabilisers, as well as partly sizable fiscal stimuli and government supporting the banking sector. This very quick rise in government debt in a sluggish growth, and financially instable environment calls for the need to asses how sustainable the debt is.

Background on problems of financial crisis and eruo area debt:::: Euro Area Government gross debt to GDP has increased by an estimated 22% since before the crisis in 2007 and as of 2011 stands at 88% (find updated figure). Ireland, Greece, Portugal and Spain increased most increase over 2008-2011, reaching around 100% or above. Debt ratios were estimated to be below 60% of GDP for only five euro area countries. The problem of increasing Government debt to GDP was also experienced in the US as well as Japan, however as a whole, budgetary imbalances have been limited in the euro Area and fiscal consolidation has been more comprehensive and frontloaded (since beginning, were looked into early on) and hence the increase in Government debt to GDP has lower than that of the US or Japan since pre-crisis levels in 2007. In the medium term (as of writing this paper) debt to GDP ratios of Japan and the US is estimated to grow higher than the Euro Area aggregate (graph attached).

Due to concerns by the markets over sustainability of government debt as well as due to the macroeconomic developments taking place since the collapse of Lehman brothers in 2008, Government bond yields in several Euro Area countries grew, in relation to Germany (see Chart 2).The increase differs among countries due to varying assessments of country-specific risks. As of this paper, it seems fiscal consolidation among worst hit and weakest countries, as well as for the Euro Area has a whole and the efforts that have been put into making the fiscal and economic framework of EU stronger has been well received y the financial markets. Similarly, stabilisation of sovereign debt markets and a reduction of bond yields compared to German bond yields, can be noted in vulnerable euro area countries

-What is sustainability, ehyeimportant

---------what are the Types of debt?? , maube concentrate on one (can get complicated depending on who owns it: also whos debt, eu, emerging etc. Also see why debt was taken or expanded) ,

MAIN ARTCILE ROUND UP::: om http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf Debt sustainability i.e. to pay debt without relief or restructuring. I.e. neither illiquid (debt restructuring or restructuring required) nor insolvent (debt reduction required). So it means both illiquidity is when debt restructuring and rescheduling could be sufficient. Insolvency issue is when debt reduction is required, while

However according to http://www.development-finance.org/en/topics-of-work/debt-strategyinformation/debt-sustainability.html when no debt relief or accumulating arrears, that debt is sustainable while Debt sustainability is an issue of liquefy and insolvency my point: Some people say illiquid is when cash is the problem and insolvency is when even raising enough cash becomes difficult. However these concepts seem connected

The author seems to have used debt sustainability and it seems he/she means paying back without requiring debt reduction or restructuring i.e. is a country illiquid or insolvent?

Sustainable debt argument:(mostly from the main article http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf) Once again as discussed above, the intertemporal budget constraints put very slight restrictions on current account and foreign debt (in terms of external debt)

http://repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdf Debt Sustainability Assessment: The IMF Approach and Alternatives

Debt sustainability is an integral part of sound macroeconomic policies, however its precise definiation is not very clear, and assessing it is even more difficult
This is not unlike other concepts in economics, such as price stability or full employment, however unlike these, debt sustainability is not even directly measurable. Every country needs to understand debt sustainability and as there is always a possibility that default will occur, perverse incentives will emerge. Private and government (public debt) or state (external debt) (WHICH MEANS EXTERNAL DEBT CAN BE GOVERMET AND CAN BE IMPORTANT, so you need o JUSTIFY EVEN MORE WHAT KIND OF DEBT YOU WILL NOTE or WILL YOU NOTE BOTH) borrowers are not entirely in the same situation though. A private default is sanctioned in line with precise legislation with oversight from courts, however public and external (excluding private external I guess) default and subsequent litigations and negations that operate i unclear legal rules and uncertain enforcement mechanisms. This uncertainty regarding public and external debt def ault is a source of perverse incentives (used to be known as moral hazard) characterised by the fact that willingness and the ability to pay are two different things. As a consequence of these perverse incentives is that several countries cannot access international markets and must rely on official lending for development. Also, countries tat used to have access to market before default, can access them once again once an arrangement has been found

Official lenders, the multilateral organization and the Paris club, cannot ignore the issue of debt sustainability. Their rule of conduct encouraged countries to undertake prudent strategies while being receptive to development needs. Subjective criterion, that eventually creates controversies.

Which is why systematic and universally applicable procedures were designed by the World banks International development association (IDA) and the IMF have also formalized their debt sustainability assessment (DSA ).<--

Gives ratinal for these frameworks and can go somewhere later as well.

Look at the definition of debt sustainability, it is simply looking to understand as to when will a countrys external or public debt, becomes so huge that it cannot be serviced fully. The analytics of both the debts is similar, as it can be seen that external debts evolution and growth is related to the primary current account balance wile public debt is related to primary budget balance. The authors in this section talk about debt and primary balance (as I believe many authors do) without specifying if its external/internal or what balance.

The IMF defines debt as being sustainble if , given the cost of financing, as discussed earlier , it satisfies the condition for solvency without a sizable correction (

(IMF, 2002, p.5)GET UPDATED DEFINITIONA. This however requires defining solvency as well. Solvency is achieved nce the future primary surpluses are big enough to repay the debt principal and internet. The current debt and the present discounted value of all future expenditures must not exceeded the resnet discounted value of future revenues or similar, the current debt does not exceed present dsicunte dvaue of future revenues, net of non interest expenditure) <-Intermproal budget constraint and the AUTHOR MVES ON TO SHOW HOW SUSTABLITY BUILDS UPO SOLVENCY AND IS FORWARD LOOKING....AND MOVES ON TO COMBINE THIS EXCELLENTLY WITH DEBT CONCPETS< as it did with INTEMPRAL BUDEGT CONTSRANT AND EVENTUALLY GOES ON TO DEBT. WE CAN USE THIS LATER TO GO ON TO CONCEPTSSEE REMINDER in the other paper to remember.Good way of transitoning between section which you can use to.

How to Assess Public Debt Sustainability: Empirical Evidence for the Advanced European Countrieshttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdf

2. Public Debt Sustainability Theoretical Aspects In the pursuit of achieving higher standards of living, creating jobs, infrastructure and generating growth, government expenses can exceed revenues. A government might be able to do this temporarily through issuing currency or debt. Issuing currency however increases money supply and therefore causes inflation which is why most economists reject using this to finance deficits. Debt too was considered undesirable however recently government borrowing is widely accepted given that public finance policies are sound. The basic foundations of sound finance is based on the concept that structural deficits should be avoided.

Keynes was the first economist to support this during a time when France ran into recessions. The idea was that deficits in recessions would be offset by surpluses during expansion and growth will offset. Permanent recessions should be avoided as no government can with the expectation that its debt would never be paid back. In the context of keynesia theory, it was believed that debt financing is necessary to achieve a sufficient level of aggregate demand when private investment is simply not enough to absorb savings over a comparatively long period of time. The assumption belongs to Evsey DOar (1944) who attempted to prove that persistent borrowing would create ever increasing debt, which would require ever increasing taxes to service, eventually crippling an economy and causing repudiation of the debt i.e. sovereign default. He argued that a constant overall defect to GDP ratio causes convergence of debt/GDP and interest/GDP to finite values As a result the taxes needs to service debt, as a percentage of GDP also, reach a finite value (WHAT DOES FINITE VALUE MEAN?? A LIMITED VALUE????). He contended that the degree of indebt ness has to converge to a finite value in order to make sure that tax burden doesnt keep on rising, other economists however (like Buiter, 1985; Blanchard, Chouraqui, Hagemann and Sartor, 1990) assumed that it must converge to its initial level maybe this goes into sustainable heading Buiter (1985) in his paper, A guide to public sector debt and deficits explicitly defined a sustainable fiscal policy where the public sectors network is kept steady at current levels, as a ratio of its output. On the other hand for , Blanchard, together with Chouraqui, Hagemann and Sartor a sustainable fiscal policy is one where public debt doesnt explode (what does EXPLODE MEAN) and therefore governments are not forced to increase taxes decrease expenditure, monetize fiscal deficit or repudiate debt. The limitations was that the present value of future primary surpluses should be equal the current public debt level. At a given time t the government needs to borrow to finance a primary deficit (primary expenditures minus revenues), to finance interest payments from previous year as well as public debt from previous year. This could be presented in a formula.

The equation defines debt accumulation dynamic, where in case of a primary deficit, the stock of debt rises faster than interest rate, while during a surplus, the stock of debt grows slower than the interest rate. make shift definitions and indictaors have been relied upon by authors and researchers, rather than a clear theoretical benchmark, as there exists none.-->continue in indicators.

EXCELLENT STRATER ARTCILE---MUST READ WHOLE!!!!! A MUST (good see abstract from original if need idea)

http://www.ecb.int/pub/pdf/other/art1_mb201204en _pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY IN

THE EURO AREA By sustainability we mean the governments ability to service all of its accumulate debt at any specific point in time (PUT IN SUSUTAINABITY). In spite of
the fact that fiscal consolidation in Euro Area was early (in its formation) and comprehensive, risks to government debt sustainability needs to be closely monitored. Conventional (standard/usual/prevailing) accounting based, debt sustainability analysis has long been used to size the risk and monitor debt and has now become an integral part of enhanced country surveillance in order to asses the size of the risk of unsustainability. . It is a part of EU and IMF reports on assessing compliance of member nations that have a financial assistance programme. However due to its limitations, the interpretations of final results of the conventional (standard/usual/prevailing) debt sustainability analysis needs to be careful. The outcomes of such analysis themselves depends upon the underlying assumptions and analytical tools used and is therefore prone to significant uncertainty. Care must also be taken as debt sustainability analysis can directly impact sustainability of government debt , as unfavourable assessments by financial markets can cause bond yields to rise, increase the cost of government debt refinancing and creating a downward spiral for sustainability.

THE CONCEPT OF GOVERNMENT DEBT SUSTAINABILITY Sustaiablity of government dbet simply means that the accumulated debt has to be serviced at some point in time and hence it requires a government to be solvent as well as liquid. Solvency is a medium to long term concept where the governments net preset value budget constraint needs to be fulfilled, on the condition that the net preset value of the governments future primary balances must be at atleast as high as net preset valie of the outstanding govermnet debt . it is the flow concept (maybe desricbed in article as well) Liquidity however is a short term concept and is regarding governments ability to access financial markets so that it can service liabilities due in the short term. (MAIN ARtcile has also discussed this, in fact, so have i)

Therefore it is apparent from that above that even though sustainability assessments need to take medium to long term view it is also important to take into regard a countrys ability to access markets in short term in order to refinance maturing debt. Otherwise, such a country could face

debt sustainability issues in the medium term as higher bond yields will increase servicing costs. Also, government debt can only be considered sustainability if the fiscal policies needs for sustaibalty are feasible and realistic (or i should write practical), politically as well as economically (A point the main article also made).

-Factors impacting/ how to determine, which is best and why or not?

MAIN ARTCILE ROUND UP::: om http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf Sustainable debt argument:(mostly from the main article http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf) Once again as discussed above, the intertemporal budget constraints put very slight restrictions on current account and foreign debt (in terms of external debt)

Concerning foreign debt, Solvency is maintained (not necessarily liquidity) as long as foreign debt discount value is non zero, that is , it is not due tomorrow. A country can increase its debt but not more than the increase in real interest on this debt (which, as the author mentioned they are assuming only interest payments and not principle payments, which can be rescheduled or tat new debt can be taken on) This is true even if debt/GDP rises and interest rates rise faster than GDP growth rates. Which means, no matter how indebted the country gets and how little its ability might be to pay back it can still be solvent, if the money isnt due tomorrow and interest rates are not rising faster than debt increase meaning it can still pay interest. (But why even pay interest, cant that be rescheduled or will it hurt the markets) it means country is solvent in any case where the infinite sum (sometime in the future, discounted values)(expenses and income, as discussed earlier) of current account equals the initial debt (i.e. Present value of net taxes in the future should be large enough to cover initial debt as well as the present value of government future expenditure. ) . That is the only restriction. Similar restriction on trade balances, such that infinite future discounted devalue need to equal initial debt. If there are large deficits and huge debt, future surpluses are required for solvency.

Concerning public debt, once again government is solvent as long as government debt discounted value is non zero that is , it is not due tomorrow. It can increase s long as it doesnt increase faster than the interest (which, as the author mentioned they are assuming only interest payments and not principle payments, which can be rescheduled) it means country is solvent in any fiscal policy where the infinite sum of fiscal balance equal initial debt is acceptable (i.e. Present value of surpluses in the future should be large enough to cover initial debt as well as the present value of future deficits. ) . However the budget constraint once again puts limits on primary fiscal balance (fiscal balance - debt) discounted flow of future Primary fiscal balances must equal initial debt and deficits today are to be offset by primary fiscal surplus tomorrow to remain solvent.(unless of course, you tweak fiscal policy) by the way, I dont understand why primary fiscal balance, and not fiscal balance.

E.g. looking at net national debt it means that Present value of net taxes in the future should be large enough to cover initial debt as well as the represent value of government future expenditure. If government spends more without increasing taxes, it must make it up in the future by an equal amount in present value or reducing purchase in equal amount in present value. Therefore it impacts fiscal policyhttp://books.google.com.pk/books?id=nnebIJ4iglcC&pg=PA145&dq=intemporal+budget+const raint&hl=en&sa=X&ei=FQvMUNa5KeG0AWCzIHACA&ved=0CDIQ6AEwAA#v=onepage&q=intemporal%20budget%20constraint&f=false . If debt doesnt have to be paid of you simply make zero purchases and service debt through taxes.

As long as debt not due tomorrow and interest payments can be made. (Assuming principle rolled over and new debt not an issue) As long as the discounted future inflow-outflow, which can be any time period, is equal to initial debt. (Or future value of inflow equals future outflow and initial debt) Which means Therefore the Only constraint on foreign debt and public debt is that they cant increase faster than interest rates. And the only constraint on current account (BOP) and primary balance, is that their future discounted value, as we discussed must equal initial debt (The example in main article and discussed earlier when looking at budget constraint in http://books.google.com.pk/books?id=nnebIJ4iglcC&pg=PA145&dq=intemporal+budget+constraint &hl=en&sa=X&ei=FQvMUNa5KeG0AWCzIHACA&ved=0CDIQ6AEwAA#v=onepage&q=intemporal%20budget%20constraint&f=false combined is the same. It is just broken up in the earlier one and a little combined in the main article) The above is a bare minimum, as it might be assuming that even principal payments can be rescheduled or that new debt can easily be taken on.

My note: The thing is, it is difficult to know if a country can pay back in the future (medium/long term) Later we will see maybe it is better to look at whether a country has enough liquidity/solvency to cover its immediate/short term needs or will it require change in debt also in terms of Greece, it snot just government debt its also banking debt or in case of US household debt) always see net debt, that is debt net of any assets that the government owns, where gross liability should be liabilities of the sovereign pg4 note) (I applied concepts to GREECE IN YELLOW, MAYBEI CAN USEIT OVER HERE) Note: One big flaw. Interest rates I have, are they internal or external debt?? Of course for Greece its mostly about external, but we require for both. But then again maybe there is no difference Overall discussion must be around, according to Budget resource constraint: What did it says about debt/gdp ratio, even if it is rising it doesnt matter. >> At http://www.tradingeconomics.com/greece/government-debt-to-gdp you can find latest figures but the thing is that it is rising, and even though it shouldnt matter, it is simply too big and rising too fast, especial government debt. Even if interest rates rise faster than GDP growth rates, it doesnt matter>> Interest rates definitely rising faster than GDP growth. The gap however is too big. But rise in debt shouldnt exceed rise in interest rates>> Rise in public and external debt is not going up faster than the rise in interest rates. However the interest rates are rising fast. Too fast. Future income i.e. primary balance and Current account should equal initial debt ATLEAST (but also expenses). >>Well, the stock of debt is too high External debt is 186.440% of GDP i.e. $556.961 Billion and public debt is 170.6% of GDP. i.e. $507.8478. Can it be paid back??? For external debt, we need current account surpluses sometime in future, but from below tables of surplus and deficits (which will be discussed later), it seems to be getting bigger and bigger every year till 2012 and for Public debt we need fiscal discipline and the primary deficit seems to be shrinking slowing down by 2011 (but so was economy I think) Not sure about future. Greek issue is governments massive external debt. From tables of trade and current account, we can see tat the current and primary accounts are both highly defecit redidden.

According to the author http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf) However these constranst are too loose, something I discussed earlier myself. ONe cant expect to have massive primary defecits (public debt) or current account (BOP) defecits and expect to make them up for sometime in the ufture. A goverment cant comitt to such long run coittemnts. EVen if they can, they might reuqire making in effeicnet ajdustments e.g. in case of public debt riaisng taxes to ru primary surpluses, which migt actually be too high, or retisrtc spenidng by retsitring supy of public goods. In case of foriegn debt to make up for current account (BOP) defecits, gvebrmnet might change exchang rates, dometsi cincome (for tade balance) or increase svaing and cut inevtsmnets whihc might be too in efeiccte. Therefore it is not actaly feaisble to urn large defeitcs.

I think and author says. lowrig exngae rate an imprve trade balance, migt hurt extenal debt, but who knows. or lower invetsment and epxnesidure by gvenrmnet cna impact incoe and lower trade abalnce, but might impact GDO growth rates etc etc So what criteria to use if the the above not good enogh for dbet sustaiablity . Well one can be forthe debt/GDP cannot keep groiwng such taht markets can make it har dto raise money. Above miht be trye for greece as there were calls for austerity since years.

(REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things are ok, and ratios are not ALL THAT BIG, then to some extent the criteria is not very bad. I mean, debt can be increase to some extent. However the authro critiques all the criteria in terms of seveirty or a situation if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria would work. but then again, why would we be looking at solvency of a country in that case)

THerefore

CRITERIA 2: for the debt to GDP ratio to be non-increasing

When looking at external debt this means, if debt/gdp is growig, the required difference in trade balance (I would argue BOP), that would stablised the dbet/GDP ratio that is keep it from growing. Also known as the primart resource gap. Author says bigger the gdp/debt ratio, bigger te surplus required (I argue NO. Bigger the increase in Dbet/GDP ratio, bigger the resource gap or suplus required. , why is suplus required. To stop it from growing, you need it to be equal. So its not the surps required, its the gap between defecits and making he defect 0)) and so will the differnece between nteres rates and gDp growth rates will be bigger, naturally. When lookig at public debt, if gdp/ratio increasing, the require primary fiscal suplus hat would need to stablise. This is primary fiscal gap. biggger reequired surpls, bigger the debt/gdp ratio is ((I argue NO. Bigger the increase in Dbet/GDP ratio, bigger (primary fiscal gap or) suplus required, but then again , why is suplus required. To stop it from growing, you need it to be equal. So its not the surps required, its the gap between defecits and making he defect 0) and s will differnet in inetrest rate and gdp growth if debt/gdo ratio is stablised , teh debt is sustaiable ad coutry is solvent/liquid. Keep in mind, closing this gap can require policies that are just crazy.

(APPLICATION GREECE)

===========GREEN DEBT APLICATiON=========== Critria 2b: HOWEVER the author goes on to expand on this criteria and says the time frame, horizon, under which the gap criteria is seen is important.
in other wor when looking at primary fiscal gap (public debt) or resource gap (external debt) one should not just look at preset or current levels of real interest rates and GDP growth rates and the cyclically adjusted (maybe stritcual) values of trade and primary balances (whatever that means) Both can be considered in differing circumstances. When solvency is not an immediate problem, permannet values can eb seen ,e.g. en growth is low.egayve for a year, interest rates aretemprarily highw and a recession maybe causing tmepraty primary dfecit or trade surpus. (in such a case permanen. I believe whta this means is that permanenet values will show actualy situation. That is, can gap be closed in future? However when solvenyc is an immediate issue the current/cycylical values of itere rates, GDp growth, trade (BOP) and primary baance must be seen.eg. if structurl fators are causing low/negatve growth e.g. caused y ovr valued currency (without currenyc rgeime cange), or too much spenidg the interest rates are very high are it is thoght t be borderline in solvent while there is primary efetcist due to sturtcrla impedimetsto growth or primary surplus because of tsutcually depresed imports..it igt be necessray to look at current gap, as a permanent ga closure cannot be achieved wiout imedita currenyc regie change or chnage in stck of debt. Exmaple being Argentina, which had 3 yar negatve growth and a market high intere srate as was considered isolvent. That is can gap be closed right now? HOWEVER this is only a benchmark. Looking at the primary and reosuce gap, the criteria of not growing Debt/GDp ratio isnt a tool to see if a certain stock of dbet is sustainable. It shows that non increasing debt to GDP ratio (no matter 50% or 150%) is sustainable and the gap mjst be closed, normative statement. However the gap ight be so big that closing it might be not feasible if initial debt is too high and debt reduction needed. Given GDP grwth and interest rate values in te long run, closing te gap might be econocialy and plictall not feasible. Means debt so high and interets in it s high that decreainsgit becomes an issue. e.g. to acihieve BOP surplus required (or as I said, maybe not necessailry surpls), gevrmnet and pritae consumton or prvate ivetsmnet might need to be reduced OR the reuqire primary suplus (or not necssary surplus) severe cut in govenent spenidng or high in taxes to close the gap and it wont be doable. SO gap analysis shows what is required , and maybe what time frame to look at , however it doest directly show that the dbet is sustaiable, as what it ASKS To do, the solutin it shows might not be possible without debt reduction, reprfling/resurtcutring. COuntry might do so, and stablisze dbet

(non increasing) in medium term, but costly long term growth , as burden of serving debt dbet would be so high, that geting debt relief for sustained invetsmnet and long term growth would be inevitable (I thinK I argued , it actualy does show a solution byy showing a bit early, if the SLUTION is feaisble or not and when or if , a debt reflief, reduction etc wil be required) THE QUESTION THEN IS, wat is considered a DRACONIAN, that is politicaly, econocally, socially unfeaisble. It is difficult but one can lcompare present growth rates, inetrets rates and primary/trade balances with historical averages to get an idea of what is feasible. gao canot be reduced without severly hampering rgowth in long run (debt overhang) (inetsment overhang in china http://www.bloomberg.com/video/s-p-s-chan-investment-overhang-arisk-for-china-nDKvJYNdR4y0vTT5fQWcgA.html) THEREFORE the above dsicussin suggests that looking at closng the gap for non incrreasing DBetGDP ratio is a banchamrk not enough to dretcly note debt sustainability and looking at debt ratios in time frame. Apart from that the main thing is to along with noting how big the gap is, it is to be seen how big the debt is and if it gap could be reduced or not or will debt reduction be required. if gap is too big, it is also seen how big debt ratios are and seen if they are feailse or not but eg .looking at impact on growth rates, inetrest rates and teh trade/primary balance, in short/medium/long run in comparison with their hostircal averages.

EXTREME EXAMPLES OF THE ABOVE SCENRIO:::: THe situaion discussed is a reality in extreme cases, probably cases where imediate rather than permanent gaps (and other variables, debt/gdp interets rates, growt hrates), have to be seen

Debt Overhang A situation where there is no incentive to invest and do reforms. E.g. no incentive to make invetsments, becayse growth will go into serving debt. High forgen debt therefore will become a self fuliffin prophecy. This can be the case when e.g. a country can stablised external debt and product larg etrade surplus, ivetsment is lowered to stabilise in short term but private lowe irnetsmnet, means lower caital of stock and lower outpt and growth.but in medium term growt is necessray for dbet sevrincg. THEREFORE counrties that realise this, have little incentve to invest or do reform. The debt is just so huge. Debt reduction, will becom enecssary here. THis may even cause a trap. That is when debt is so high and servicng it inhibits growth so much (maybe through sevcing. or reudcing gap) that even creditors would benefit from reduction. IN such a case delaying releif can increase the problem. A leffer curve migt eve exist accrnd to ~(1995) where

Market value (y axis-dependent) might increase with debt levels ( x axis-independt) but eventually migt get so high that the maret value of debt decreases and thereof a writedown that is reution insfac evalue wil cause akrte vaue to rise, something taht credtors would love, as desricbed earlier...it might be related to the trap. (This is when teh countrys behvaiur is domntaed by negative implicite tax incentives efftc on domestic investment and reform effort, that is the tax would get so high to make up for the debt servcinig, that it can impact domestic ietsment and reform. ) <-WHAT When the dbet is in ed of elffer curve, both debtor an dcretor benefit from debt wirte down i.e. it is pareto impriving (whatever tht ameans), but even if this is not te case and credtors loose out, it miht be necessary to write down debt as the burden impacts inevsmenta and actvyt levels and trap a coutry in low growth equiblirim. THerefore Gao analysis is normative, it shows what the problem is, but isnt a tool to asses solvency as it reducing the gap to stablise debt/gdp ratio, might simply not be possible. (This lafer curve issue might be prevalent in emerging markets and IMF and G7 shoud nudge private cretdors to a debt relief shceme. The G7 did it in 1980s by rejecting baker plan and goig for brady plan, sch official leadership was key. One should not wait for market (as it can be too lte for everyone) and fficial instutions in creditor nations would be needed to nudge private creditor sto consider dbet reudtion (CASE IN POINT, Greece) (REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things are ok, and ratios are not ALL THAT BIG, then to some extent the criteria is not very bad. I mean, debt can be increase to some extent. However the authro critiques all the criteria in terms of seveirty or a situaion if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria would work. but then again, why would we be looking

(APPLICATION TO GREECE)
CRITERIA3a (carrying forward from all the above, espeially gap analysis): NO easy or single criteria
Distingusing illiquidity and insolevcy are not easy.BUt indicators canbe used i think as he says in the intro points of the paper Also INsolvency and debt sustainablity , are dynamic conepts e.g. economic and fiscal reform can restore solvency or oil price rise can make a once oil producing insolvent country , solvent again. Possiblit of poitcial an dinsturtcn changes that may or may not happe (or their impact) and uncetrainty about foreign and domestic shocks , insolvneyc is diffuclt o asses and maybe a series of cerition is require. (indicators to look at iliqudiy vs insolvency) One approach is TRADITIONAL INDICATORS

For external people suggest external debt to GDP, external debt to Eports, debt service to GDP, debt service to exports. Market price (discussed later) of debt can also give an idea of how themarket prviecies the likelihood of the country being able to service thd ebt in time and in full For public debt, author susggest public debt to GDP, public dbet to government revenues, debt service to GDP, Debt service to government revenues. All have procs and cons. Assesing solvency is an art and looks at a broagd range of factors, indictars as well as forecasts about likely future policy events and shocks in the country.

(YELLOW APPLICATION T O GREECE NOT DONE)

CRITERIA3b (carrying forward from all the above): Historical averages of the ratios compared to wat is due and if gap ca be closed.
(But how to continue? Well, the IMF thing complements criteria 3a, look at its details and all and put it there. For the rest, just start findg more stff and adding it e.f. what si fiscal gap?? or gvernet budet etc on wiki add it here.)

As discussed earlier, closing the gap might not be feasible, but what is not feaisble. we said what is a severe or draconian difficulties i.e. politically, socially and eocnocclaly feasible. It is difficult but one can lcompare present growth rates, inetrets rates and primary/trade balances with historical averages to get an idea of what is feasible.

To see wheater dbet paths are sustaible, and debt stablty can be acived through clsing gaps, in a sesible scanrio one can asses meidun term prospects . To make this assesment we can look at avrga veluaes of ariables such as GBP growt rate, trade and curnet accnt balance, discal defeucts inetresr rates, non debt creaing capital infolows e.g. FDI) which can help us not what resources are vaialbe to service debt (considering te principal is roled over) (and i think it can show even if a pricple can be paid or not)....that is if a country is solvent or liquid, And it can also help us note whether resource/primary gaps can be closed under the resaoley assumed values of the variables just discussed i.e. if debt stability could be achieved or not. Its like cash flows. Expected resouecs are compared to medium term due interest payments (time horizon defined). As I understand, assmuning principal is bring rolled over, and reprofiled, and the debt cant e serviced i.e. inetrets cant be paid, its a solvency issue. (and if means, if princpal cant be paid, but interest can, its a liqidity issue (less severe)as we can get reprofiled, reshudled, its a liquidity issue) Simialry, if under the expecte values of the variables, the gap , historical value of primary fiscal balance, trade balance, growth and real ietrest rates suggest that closing the primary or resoue gap for debt stability o sot feiablse under reliastic conditions ad scaneros about macro variables, then

debt is seen as unstable which means closing the gao is necessray...in medium term they are saying.I.e. NOt reducing the gap will eventualy make det paths unsustaable. One thing to remember thog is that it aye not be saf etoa assume that princple is roled over as markt price of dbet can be too hgh and makrt access canbe lost. therefore roll over can mean no, (or i guess expensive) future finnaicng. In ay case, cash flows are real , interets payments or amoartization of prinicapl. (Immediate Servcig profiles themselves it must be remembered can be different depending on whther debt is short, long term, zero-coupon, amortizing or bullet. ) Therefore service profie is not important (as author assumed till now) but overall burden of stock that eeds to be serviced over time. therefore however it is still important to consider overall debt servicing and principal payments, as these are real cash flow negatives and also because the market can block you out , even if current debt is reprofiled) (But first whats the diffeence profiling vs resturcting or reschlding?? Maybe this helps http://www.globalmoneyportal.com/to-raprofila-or-rastructura-tha-auro-a105978.html, accordint to this greek debt article wich repfoiling is like having long term debt replacing a shorter term debt without impacting coupon or principle, although it sounds like rescheudlig..like of. Popel give their bonds for new ones and someone is likelu to do so to eventually actually do getting paid. Anyway But somewhere the artickle spoke about how principal about or initial debt can simply be renegotiated (check ffor this word i article)

Time thingy. I think this medium term thing can relate to Time horizon to note gap analysis as well (criteria 3b). THis medium term is also looking at below (criteria 3c) As orignall mentioned in criteria 2b (again gap analysis), where he talks about ga nalaysis time horizon and says::: There are arguments in favor and against using permanent rather than current gaps. In normal circumstances where insolvency is not at stake it may make sense to look at the permanent gap; if growth is low or negative for a year or so and real interest rates are temporarily high for some reason while a recession is leading to a transitory primary deficit or a temporary trade balance improvement, it does make sense to look at the permanent values, rather than current/cyclical values of these variables. But in situations where structural factors (such as a persistently weak fiscal position, or an overvalued currency) are leading growth to be low or negative (in the absence of a policy/currency regime change), are leading real interest rates to be very high because the country is deemed to be borderline insolvent and leading primary deficits to be high because of structural impediments to growth or trade balances improved because of structurally depressed imports (with growth being structurally low or negative), it makes more sense to look at the current gap rather than the permanent one as the permanent one cannot be achieved without a major change in regime (be it the currency regime or the stock of debt of the sovereign). This is important for the case of Argentina that has had over three years of negative growth and where real interest rates are extremely high given the market belief that the country is insolvent.

(YELLOW APPLICATION TO GREECE)

CRITERIA3c(carrying forward from all the above):-Using Maret value of debt to note ustsainablity ie (using market vakue of debt and seeing cashdlows)
Although dbet reprofiling can redice short term costs it might sverley increase medum term costs, as it did for Argentina in 2001 Therefore to note sustaialyt, it is important to note tat debt burden is sustaiable. one way is to look at disoucted cash flows for dbet svrincg (amortizatin of princiapl and interest). (Casf flow disussed earlier, when disucssing that if hostorical inflows are noted it can be seen if debt can be seviced and gaps can be closed) But wat disoucnt factor to use? If current market rates/spreads are used we get cirrent value of debt. but if country is possile insolvent and may default this will give current low vaue of debt. The uathor rgues however, that if the price has coorected priced the risk of default then this is the correct value of dbet and hence a measure of how mch debt reduction is reuqired to achieve debt sustainatlity. (but how can old debt, be priced by todays market price??...maybe it can) The market price (which I believe is used for disocunted cashflows) can be mispriced due to panic, where spreads are unreasonbly high compare dto fundamnetsl or where returcting is immeinet and debtors are trying to reduc ethe makret value of debt to get a better deal. In any case if market vaue of debt is VERY different from value of prospective cashflows payments discounted by a risk-neutral discount (why discounted?) rate, a debt reduction maybe be justified.

(YWLOW APLICTAION TO GREECE)

{{{{{{{{{{{{{{{{{{{{{{{{{Applied to Ecudaor Application to Ecuador: Ecudaor in 1999 accoridn to aboe criteria, the medium sustainability of debt was higly unlikely and it seemed the country was insolvent. *40% of budget was going to sevice dbet *Buffeted over and over by negative shocks to its main export commmities *In 1999 banking system was in shambles and was bailed out, frther putting pressure on public sector. It cost 15-20% of GDP

*Debt/GDP, Debt to export and debt to govberment revue ratios all were extremely high (more than 100% for debt/GDP). Higher than emerging market average and cloe or above HIPC ratios (heavily indebted poor countries) *The aount if primary and trade balance adjsment necessary ro stabluze the dbet ratios (close the gap), based on the historicl averages of GDP growth real interest rate and primary and trade balances, was not feasible without dbet reudtion in govenrmnet and external debt. *Debt reflief through Brady programme in 1990s was very modest and not reduce debt burden much and debt indivdtars actually worsend over time. Rather than being illiquid, (that is a rollover or i think reprofiling and not debt reduction) the broad indictoars showed it was insolvent. External debt was unsustaibable and debt reduction was justifedto restore medium term debt profile.

I think Greece was in a similar position but maybe not as bad as Argentina.

DO FOR GREECE <ANOTHER YELLOW, NOT DONE>}}}}}}}}}}}}}}}}}}}}}}}} debt reduction was reuqired to restore medium term sustaiality of debt profile

{{{{{{{{{{{{{{{{{{{{{{{{{Applied to Ecudaor Application to Ecuador: Ecudaor in 1999 accoridn to aboe criteria, the medium sustainability of debt was higly unlikely and it seemed the country was insolvent. *40% of budget was going to sevice dbet *Buffeted over and over by negative shocks to its main export commmities *In 1999 banking system was in shambles and was bailed out, frther putting pressure on public sector. It cost 15-20% of GDP *Debt/GDP, Debt to export and debt to govberment revue ratios all were extremely high (more than 100% for debt/GDP). Higher than emerging market average and cloe or above HIPC ratios (heavily indebted poor countries) *The aount if primary and trade balance adjsment necessary ro stabluze the dbet ratios (close the gap), based on the historicl averages of GDP growth real interest rate and primary and trade balances, was not feasible without dbet reudtion in govenrmnet and external debt. *Debt reflief through Brady programme in 1990s was very modest and not reduce debt burden much and debt indivdtars actually worsend over time. Rather than being illiquid, (that is a rollover or i think reprofiling and not debt reduction) the broad indictoars showed it was insolvent. External debt was unsustaibable and debt reduction was justifedto restore medium term debt profile.

I think Greece was in a similar position but maybe not as bad as Argentina.

DO FOR GREECE <ANOTHER YELLOW, NOT DONE>}}}}}}}}}}}}}}}}}}}}}}}} debt reduction was reuqired to restore medium term sustaiality of debt profile

CRITERIA OR NOT(carrying forward from all the above):??????WHAT DEBT RATIO IS BEST???
arguments below and strange exmaples which might not be necssary Severl aindictars of external and discal debt sustaiablity exist to asses solvency. THree most common are debt/GDP , debt/export and debt/gov revenues ratios. Look at which is approprte is necssra to asses debt sustalbity.

Criticam of debt/GDP ratio> difficult to see which is better. While argentina debt/ratio at 50% looks like any latin country debt/export ratio at 400% is to high. Looks solvent with one inslvent wth another. {{{{{{{Howeve in case of argentina is said that the currency is overvalued. To restor rgowth, currency will aprreciate, exports will fall and thediffernet between both ratios wil be lower, as exports increase and debt falls. (is this only for extenral dbet...or I believ, value of inetrnal debt woudl fall as well, well, depending on when it was issued). later in artcle it says thta proetcinsim or ovevruae ducrneyc is keeping exports low}}}} Criticism of dbet to export> It is necssray for extenral debt, as hard cucrney ccomes rom exports (or BOP). BUt its not exports, it trade surplus (import-export) (i would say BOP surplus), oterwise unsustaiable external dbet. ALso, some counrteis are syrtctualy such taht debt/export ratio remains low and therefore debt/gdp maybe more approoiet. {{{{{{{{{{{{{{{{As an example, two coutry trading with eachother and the world, as seprate and combined, there debt to GDP ratio stays same and they lok solvent in each case, but when combined their debt t export ratio doubles and the ratio take it s fro solvent to insolvent therefore

the author concludes that debt t GDO ratio maybe be faulty as Larger ounrties with great intraregional trade rather than international trade, can seem insolvent while saller courties with similar fundamental would look solvent just because their export to GDP is higher. }}}}}}}}}}}}}}}}}}}}}}}}}}} In which case Debt to GDP ratio just MAY be a better measure of solvency. Then again, debt to export cannot be disregarded, as debt/export ratios can tell some interesting thinsg about countries and their abiliy to pay back. The two country exmaple, of high intra regional and low internation trade, making it a large closed country, where debt/export is naturally high. However a argentiina shoud naturaaly be a small, open, interntainaly trading country like argentiina should have high export ratios (export/gdp etc). (WHAT ABOUT GREECE) HOwever as it is low, it migt show that the currency is overvalued, protetcionsism or retsitricve policies hinder export rathe rthan structural factors. >>>Botton line is that Such counrties, with high debts and low openness (low export/GDP) might not be able to service debt and even considerble reudtci in vaue of currneyc cannot change the trade balance to an extent taht resource gap culd be closed and debt sustaibliyt (therefore solvency) could be ahciveed/ Therefore present export ratios (meaure of openenss)_ can influence how ikely a ocutry can sevice dbet (and what needs to be done). (Altg I think rgnetna, with an extreme 400% debt/export ratio is an unfairly extreme example to make this point. Its a point that canbe made wit any EXTREME ratio. Reated to the above is Crticism of Debt to GDP and Debt to gvermnet revenues.>>> debt/gdp vs debt/revenues---If most of teh extenral dbet is of the soverign, or when one is looking at domestic public debt , then debt must be compared to some fiscal vairable. Also, if government rveue is small compared to GDP and is structuraly unable to raise revenue out of GDP, then GDP is not a good measure, and gvermnet rveenues are a better scale. (His arguments are based on situatin and exmaples) But it can be argued absolute gievrmnet revneus are not an appripare scale, rather the ability to achieve primary surplus (reenue - non interest spenidng) (althogh i would argue, not the bailty, but the actual primary surplus...well, actualy it is the abilty because there not always surplus)..(simmilar argument had been used earlier where debt to export was not good, but actually trade surplus is .... and as can be seen, it is stll beni assumed thatti stablised debt, the dbet/gdp ration eeds to be non increasing and lcosing the gap) debt/givenment-- HOwveer If rveneues are a large percnetag eof GDP, primary adustmengs can be made eailsy to achivee debt sustaiality, therefore ths ratio cnanot be ignored either. Therefore the author suggests that all the abve have pros and cons (more suitable in different coditios) and all may be useful in making an ssesment, however once again I think a coutrys history,

historical averages of ratio, its strutucla make up govebrmnet aims, relations, requirements, debt sevrincg reuqirments, compairosn to similar countries in size or development or structyre etc, shoud all be known [[Note toself:I think the author I think in any case combined the ratios with'gap nalaysis, histricla avreages' etc e.g. to see how likely gap clsing was, through historical aveges of variables.]] IGORNED A RECAP THERE.

{{{{{{{Application of debt ratios to Argentina <<DO FOR GREECE}}}}}}}} Based on the three debt ratios. Argentina in 1999 had debt/gdp of 50%. Not insolvent (even though Must be warned that because of overvalued currency as mentioned earlier and depreciation could increase this to 70%) debt to export of 400% make t look insolvent (but such a small, open ocutrt should have higer export) Debt/gvenrmnet revenue (or ability toa achivee primary urplus, in a way whihc deterine solvenyc more closely) at 200-230% range it looks insolvent. Again, it must be seen if we are discussing domestic (public) debt or if they have external debt, what are sovern liablaities

OVERALL@:::I think, they all may differ. but it is asuming in solvent because gap closing is very difficult an not feasible. Accorind to Budget constrinat however, it might be feasible buut unreliastic. ALso gap anlaysis, SHOWS hwat is needed, but might be unfeabsle. But maybe the ratios and their compairosn to historocal values (and maybe what is required in future) can help dtemrin eit, as seen in ceriteria 3b. RECAP of TWO NATIon, i omitted EXCELLENt for critie of ratios and measurments --> http://ec.europa.eu/eurostat/ramon/statmanuals/files/external_debt_guide_2003_EN.pdf (REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things are ok, and ratios are not ALL THAT BIG, then to some extent the criteria is not very bad. I mean, debt can be increase to some extent. However the authro critiques all the criteria in terms of seveirty or a situaion

if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria would work. but then again, why would we be looking at solvency of a country in that case)

CRITERIA 4 (Related t market value discussed in Criteri 3c) INterest rate impact n debt, det dynamic and slvney:: (higher market price leads solvnet to insovncy, as debt becomes, exensve, more diffiduclt and more needed) IMpact of interest on debt dynamic is imprtant to consider. If debt gets too high, the market can price it higher , such that it cant be serviced on time. Whihc is when the sreads show likely hood of partial default i.e. when debts cant be fully sevicedon time. (why not full default??, becuase these things happen in a sequece?) Cetrus peribus, risk ajusted interest rate will make a cutrys given stock of debt accumlate (I THINK it means as probaly higher interest rates mean, even biger loans are needed , more often) In such a hgh interest envirnment, even if a coutry/goenrmnet is foowing sound policies, tryin to avoid default will make the debt ratios go higher. A coutry might eb victuim of self fulfiling solvency trap , where invetsors themsleves assemntdefault to be more likely, trgger interest rates that otherwise migt be low, to become high (high er sujectie rathe trhna lowe orbjective probbality). Even if high inetrets was not justfied, the cuntry might be forced to default, in euqibalirim. Even if tey dont default, cost of borinwg can becoe prohibiivtely high. Therefore one can have severl eqabiriam where any subjetcive probality of default beccomes self justfied, altough fundmetasl might not sya so. The higher probabli leads to hher sovergn spreads, which in turn forces the borrinwg to default to justfy having comiitted to such high interest rate. suc Perverse dynamics an issue for oduntries betwen iliqudity an dinsolvenyc. When iliequid, markets are uncertain about probality of default, any increase in obetcve problaity means the market, whihc includes risk avere inevtsors, to react by spreads increainsg of ocurty/gvj and worseing their debt dynaics, thus solvent agent becomig insolvent.

Inhigh interest situations.Although if eveyrone pays on time woudl be socially efficnet, high interst on insovent cunrtries represnte objetcve probaly of default. In equailibirm, insolvent counrties/gvs will default such that net of defualt return will on averge be clse or equal to a safe asset like US traseruies It doesnt make sens eo belvee that everyone in high inetrest can pay in full , on time, everytime for eveyrbod. otherwise after default the real cost of borrinwg would be too high and prices would be mis priced e.g. if russia paid i full GKOs of 70% the real borwwing costs would have ben proibitive. The agurments says that the inetrest above riskles rate should default in propoertion to spread. Cuntries shoudnt be allowed to default lie that, if debt relief was easy, there is incentive not to pay i.e. debtor moral hazard. HOWEVER high interest the uathr says does refelct (espeialy in

docuntres/gov in diffiuclty) that they wont be paid bac in full. If makrte prices the high risk correctly then in euqlairim, defaulst will occur from time to time. Some countries/gv that brromwg before dfeaulting at high spreads, migt be able to service teir dbet given the changes in their eoncie and the realization of the shck, while for others it wil creta enegtaive dveekoments and shocks that insolency will occue BOTTOMLINE

(from the Main article):::::from the above discussion we can see:

when close to uncertainty and insolvency A country might be trapped in a self fulfilling prophecy, i.e. if defulat is expected, the spreads could rise and turn it into an actual default. If its only a illiquidity or semi liquidity issue (mexico 94, korea 1997) we have other (better) options rather than debt reduction or sovereign debt restructuring mechanism( i.e. specifically, official exceptional financing may be warranted or debt could and should be rolled over (if collective action problems can be solved) outside a SDRM) Also, if a country is insolvent, the spreads might still widen beyond what is justified by fundamentals. in such a case if debt is restructured so that the coupons on instruments are reduced. This is not really a haircut (NPV reduction) as only the component of the instruments that represent the 'bad equilibrium ' element of the market spreads (that have become too high), needs to be reduced so , enabling debt sustainability and helping avoid a trap. Also reducing coupons will not represent a loss for investors as the rise in market value will make up for this as the coupons were reduced only considering only the bad element of the self fulfilling spread, therefore making debt sustainable and giving it higher value. (e.g .Argentina high spread right now because of actual risk of default, insolvency and inability to pay, but even ten it is possible that there is a bad element of self fulfilling default that is a component of the high and volatile spreads. restructuring to reduce coupon for only the self fulfilling bad component, will make debt sustainable) (initially i thought this meant bad bond, but no it meant the price risen due to market panic or subjective probably of default , that is not fundamental)

(REPEAT AFTER ALL CRITERIA :::::I think, in normal times, as discussed laterin Time horizon, if things are ok, and ratios are not ALL THAT BIG, then to some extent the criteria is not very bad. I mean, debt can be increase to some extent. However the authro critiques all the criteria in terms of seveirty or a situaion if therefore the problem was not that severe or that exact situatin didnt exist, perhaps the criteria would work. but then again, why would we be looking at solvency of a country in that case)

EXCELLENT STRATER ARTCILE---MUST READ WHOLE!!!!! A MUST (good see abstract from original if need idea) http://www.ecb.int/pub/pdf/other/art1_mb201204en _pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY IN
THE EURO AREA

3 CONVENTIONAL DEBT SUSTAINABILITY ANALYSIS Te section looks what the actual concept of government debt sustainability is (which will go in the above section), and then goes on to look at the theoretical foundations of conventional debt sustainability analysis. It then goes on to give projections for euro areas aggregate debt development in the medium term. The emphasis is on the fact that conventional debt sustainability analysis is subject to a trade off between theoretical integrity and simplicity. Conventional debt sustainability analysis: Is an accounting practice based on the standard debt accumulation equation (referenced in the paper), according to which the change in debt to GDP ratio (bt ) is derived from accumulated effect of three constituents, namely:

a- The interest-growth differential (which i believe means the difference between the GDP growth rate and the interest on the debt). It shows the impact of the debt ratio increasing the real interest rate as well as the debt ratio decreasing real GDP growth rate (again formula referenced in article) re read in article, i think they mean to say it shows the impact of the rising debt ratio increasing the real interest rate as well as the rising debt ratio decreasing real GDP growth rate b- The primary balance (pbt) which I believe here means the primary fiscal balance (government expenditures and revenues, less interest)

c- deficit-debt adjustment (ddat)

that part of the change in debt to GDP which is not reflected in the deficit of a country (WHAT!!!!). It is derived from such things as i-a change in the size of foreign currency denominated debt related to

a change in exchange rate, ii-financial transactions made as a result of government support to financial institutions iii receipts (income or inflows) from privatisation or iv purchase of new assets. It is generally based on the gross general government debt and not on the net debt concept which nets the governments financial assets (WHAT!!). This is because, the definition of financial, as compared to non financial assets is different among countries and therefore makes comparison difficult. Also, this is because net assets are not always easy to liquidate. In any case, financial assets do represent an important cushion for EU government in order to address debt sustainability, where financial assets represent about a 1/3rd of the value of government liabilities. This is also the case for government holdings in state or party state owned companies, where receipts from reducing ownership can help reduce public debt. However, in spite of this, such sale receipts in countrys that are facing liquidity shocks may only be able to created limited revenue in an already weak economic environment, if it is possible at all. Therefore even though non financial assets effect the size of the net debt and are appropriate to assess long term debt sustainability, a more sound definition of debt should only include financial assets that can be liquidated (and hence support debt sustainability) at short notice (when it is actually required). If it is assumed that deficit-debt adjustment (ddat) is zero i.e. ( which means there is no part of the changing debt to GDP ratio that is not reflected in the deficit) and the interest-growth differential is positive, real (or not net) interest rising faster than real (or not real) GDP growth) therefore debt is increasing, two conclusions can be made from the debt accumulation equation i.e. in order to stabilise or reduce debt to GDP ratio, appropriately large primary surpluses will also be required and the second conclusion is that countries with high debts need larger primary surpluses to stablise or reduce debt to GDP , as compared to countries with lower debts.

http://www.ecb.int/pub/pdf/other/art1_mb201204en _pp55-69en.pdf

In the case of positive deficit-debt adjustments (change in debt to GDP not reflected in deficit, positive here would mean taking up debt that is not shown in debt to GDP I guess), as seen during the financial crisis due to government support to the banking sector, primary balance adjustments needed to stabilise or reduce debt to GDP would have to be even higher. The above chart 3a shows aggregate debts for the Euro area for 2010-2020, under a baseline and consolidation scenario (whatever that is). The scenarios of aggregation of dynamics of all Euro Area countries is based on the ECs 2011 autumn forecast upto 2013. After this period (2013) the real interest rate, growth and primary balance assumptions of the scenarios are based on -Real GDP is based on potential growth after 2013 assuming that slowly the output gap will be closed (output gap?? Is it primary gap?? In any case is referenced to another paper) -The average effective real interest rate is assumed to slowly converge to 3% for all the Euro Area countries. Real interest being defined as an average effective interest rate that reflects a projection of interest rates at varying maturities and maturity structure of government debt. IN general, the impact of market interest rates on debt sustainability analysis results depends on quickly they effect refinancing needs of a government (something like this discussed earlier in the paper)

-As for primary balance (pbt) the structural component is assumed to be unchanged until 2013. From 2014 the headline primary balance improves with the lower cyclical deficit component, while the structural balance remains constant.

Deficit-debt adjustment (ddat) is assumed to be zero onwards from 2014. In order to assess how sensitive the results are to shocks, a bound test is conducted: in the consolidation scenario, where a mechanical adjustment in the structural primary balance of 0.75 percent points is assumed (in contrast to keeping the structural primary balance constant as was the as en baseline scenario) until a balanced budget (in structural terms) is realized. Looking at the chart, it can be seen that under the baseline scenario, the debt to GDP ratio is to level off in 2013 after which it decreases very slightly, after which it rises again at the end of the period under study. However under the consolidation scenario the debt to GDP ratio there is a stronger downward trend after 2013. In a scenario with slower or lower growth and/or higher interest rates than in the Vaseline scenario the GDP to Debt ratio would be on an unsustainable route. However it is important to stress, that the results are only an illustration of the Euro Area and are based on ad hoc assumption of medium term developments of interest growth differentials and primary balances and only reflect the aggregate sustainability risk for the Euro Area countries. Therefore the results have little meaning for policy consideration. Another important point is that aggregate sustainability does not imply government debt sustainability at country level. This is important as sustainability in one country impacts others and create a wider contagion, eventually creating financial stability and fiscal sustainability risks for the Euro Area as a whole (but if aggregate is fine, why would it create risk?? Or perhaps country level can just show origin of a problem?? Which would eventually show up in aggregate risks as wellI think.will it show up eventually in aggregate results?). This reflects the institutional framework of the Euro area, where fiscal policies are still to a large extent a national consideration which is why according to the author, it is the duty of each member country to pursue sound public finances and contribute to stability and smooth function of the EMU.

CONTINUE FOM HERE, MUST READ as a STARTER ARTCILE- A MUST TO READALLL, DONT GO AHEAD WITHOUT READING ALL pg62>>

Fiscal space: (only looking at advanced economies and ONLY PUBLIC DEBT)

http://econweb.umd.edu/~mendoza/pp/w16782.pdf (working paper by IMF) <-Its too detailed, summarize it when taking it to next draft and must read the original paper to make sense of this, honestly..maybe use it to

actually sumari paragraphs in ones and quickly deal with this, but only those parts that I covered below. Get to the point and thats it
The authors look at whether there is any space for fiscal manoeuvring, what can be called fiscal space to note whether advanced economies require urgent fiscal adjustments to ensure debt sustainability. <<more into to this article in intro. The authors seek to create a framework to look into debt sustainability of advanced economies by creating debt limit, above which fiscal solvency comes into doubt. Fiscal space being the distance between this debt limit and the current debt levels (maybe what http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf has called the primary and resource gaps, although this article seems to look at only FISCAL) In the model, there is a sovereign borrower that uses the fiscal reaction function in response to changes in debt (WHAT IS THIS FUCTION!!!?), there are risk neutral creditors that arbitrage the expected return on government debt with a safe interest rate, taking account of the risk of default i.e. the rik premium rises with the risk of default (which mean higher debt servicing costs and higher probability of default ( Again mentioned yby main article i detail

http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf)

The premises of this analysis is that advanced economies increase primary surplus as debt servicing costs increased in order to stabilise Debt/GDP ratio. This has been empirically backed by findings of Bohn (2008) (SEE HIS PAPER) for the US and by Mendoza and Ostry (2008) (SEE THEIR PAPER) for other industrial economies. Despite exceptions in times of war or fiscal fallout from a crisis, this largely holds true given that the primary balance rises to offer costs of servicing and bring back the debt/GDP in line with its long run value. However the primary balance doesnt always increase to offset the increasing in servicing costs, as at high level of debts it might even require the primary balance to be higher than GDP. In this case, even if interest rates do not rise (to ignore the possibility of risk of default impacting interest rates), the government would necessarily default. In reality, it will occur even earlier, as default becomes probably and debt dynamics worsen and an even higher primary surplus is required. This fixed point problem of higher probability of default causing higher interest and in turn rising probability of default as no solution at a finite interest rate (interest on bond) and it is the debt limit at which the government looses market access, debt cant be rolled over and it defaults.

To determine this point, we solve simultaneously for the probability of default, the interest rate Faced by the sovereign and the debt limit. in a way related to budget constraint??! Unlike Bohn (1998, 2008) (read him!!!!) who shows that in order to satisfy the intemporal budget constraint, the primary balance should be positively related to lagged debt (WHATS LAGGED), but is to weak of a criteria for sustainability, as it doest consider the possibility that debt/GDP ratio can go on increasing till a point where the primary surplus would need to exceed GDP. THEREFORE the proposes a stricter criteria where public debt needs to converge to a finite proportion of GDP i.e. a

certain Debt/GDP ratio should be aimed at.main article agrees http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf (I think it requires the ) If the primary balance is always remains a specific, constant , proportion of the lagged debt, then a sufficient condition for this strict definition is that the responsiveness of the primary balance must be greater than the interest rate-growth differential, i.e primary balance must rise faster than interest rate growth. However once the possibility of fiscal fatigue, where primary balance responds eventually slowly to rising debt than the interest rate-growth differential there will be a finite debt limit. (primary balance cannot keep up with rising interest rates).

This is supported by their study of 23 economies between 1970-2007, show that there exists a non linear relationship between primary balance and lagged debt, thereby showing characteristics of fiscal fatigue i.e. primary balance rises slower than rising interest. (I think, check). When debt is small, there is no relation or a very small negative one, but as debt rises, so does primary balance, (which is great), however its responsiveness to growing interest decreases and ultimately becomes negative when debt becomes very high. The relationship remains even when several conditioning factors are considered and a variety of estimation techniques are used. The author did this by empirical estimates of the reaction function of primary balance with the actual interest rates or endogenous interest rates derived from the model and therefore determine a countrys debt limit as well as the available fiscal space (fiscal adjustments or manoeuvring that can be made). The results show that Greece, Italy, Japan and Portugal have the least fiscal space (manoeuvring capability) while Iceland , Ireland , Spain and UK and UK are also constrained. On the other hand (in contrast the author uses) Australia, South Korea, New Zealand and Nordic countries have the most fiscal space to deal with unexpected shocks (what shocks?? Such as revision on data??)

The authors make three contributions: The author has given a defifination of debt limit (--autheir says debt limit is beyod which debt cannot eb rolled over. debt limit beyond which fiscal solvency is in doubt. E.g. market price rises so much in anticipation of default, interest premiums rise so much that it in itself increases probably of default with no solution at finite interest rates. We then define fiscal space as the distance between the current debt level and this debt limit. defined as the difference between projected debt ratios and debt limits, or diferentce between current debt level and debt limit. Do countries have room for manucrvblity? [which it seems gives them manuvriblity] that has the reasonable properties of increasing in the countrys average fiscal effort and decreasing in the interest rate-growth rate differential.

Secondly, The model they use shows how government can suddenly loose financing access any changes in market sentiment about possible shocks (that might not occur) can lead unsustainable debt dynamics. Thirdly, empirical estimates of fiscal space available to advanced economies is given and they contend that their approach quantifies the extent to which policy and institutional changes can support in increasing the space that is available (my note: if it is quantifiable, then obviously it show the extent to which policy can impact it). The section II of this paper develops a theoretical framework and ultimately derives the debt limit. While section III presents estimation results for the fiscal reaction function and reports the estimates of the fiscal estimates available for the sampled countries.

-Really< i am lost after this, do I need the rest?! Maybe actually quck one liners

Theoretical framework (basis) for the model 1-Soveirgne creditors and debtors: FORUMLA Looking at the credit relationship between a sovereign borrower and numerous small creditors . Looking at the standard budget constraint formula. The interest rate is set exogenously (probably by the market) and is equal or greater than the endogenous risk free interest rate (in equilibrium, the interest rate will be an increasing function of the probability of default, as shown below)<-ofcourse The author makes three assumptions about this credit relationship. Assumption 1: there is a fiscal reaction function with fiscal fatigue (there is a relation between fiscal policy and fiscal fatigue) The government, it is assumed in this relationship, is committed to following this FORUMLA Limited support is possible here for fiscal manuoveruing as primary balance (deficit or surplus) canot go beyond 100% of GDP (although in real life it might exceed it by a few percentage points)

FORUMLA With the worst primary balance shock, debt is non increasing, and for higher ratios of debt, the response of primary balance is lower than the growth-adjusted interest rate, as we discussed earlier and was proven by the authors experiments.

Assumption2: Government defaults only if debt goes beyond debt limits This debt limits is defined as when at a finite interest rate (does it mean given that there is a finite/limited interest rate or that there is only one interest rate???), the maximum a governments maturing debt that can be rolled over and finance primary deficit. After which roll over is not possible FORUMLA Assumption3: Creditors are risk neutral (neither risk averse, nor risk seeking) Creditors are small, numerous and risk neutral who lend to a sovereign assuming (i)I The probability of the government debt/GDP going on an explosive path is less than unit probability (i think it means 100%) . By explosive it means increasing without limit regardless of primary balance shocks in the future. (what shocks, such as revision data?? But what else, sudden movements??) And (ii)That there is a finite interest rate (again, does it mean given that there is a finite/limited interest rate or that there is only one interest rate???), [does it mean 1 single interest] which compensates for the endogenous risk of default being taken up by the risk neutral creditors. FORUMLA

The arbitrage implies that as long as probability of default is more than 1 and less than unity (which i think means 100%), the default risk premium is positive, increasing convex function of the probability of default. (iii) If there are multiple interest rates that satisfy the above arbitrage condition, then creditors are assumed to choose the lowest such interest rate. 2.2-Rationale expectations equilibrium and Debt limit The rationale expectations equilibrium of this model needs to be established. This is define as the sequences of different interest rates and public debt at which the governmental is able to satisfy the budget constraint , its reaction function (reaction of primary balance to debt I guess, written in the formula above function formula above) and the default rule (whats that???), while creditors are satisfying the condition of arbitrage. The authors then aim to analyse and establish the debt limit that is the maximum debt at which the government is able to borrow at a finite interest rate (once again, does it mean given that there is a finite/limited interest rate or that there is only one interest rate???). For this the author characterises the models equilibrium default probability and establish well defined limits within

which the debt limit is determined. Appendix I provides a full derivation of the debt limit and its properties

looking at the models equilibrium default probability , the probability of the soverign defaulting in next period is the probability of the debt increasing more than the debt limit. FORMULA and therefore the creditors arbitrage condition can be rewritten as FORMULA there might be several solutions however keeping in mind assumption 3(creditors are risk nneutral) a unique solution is ensured given by the lowest interior solution.

Bounds on the debt limit He authors then establishes a debt limit within upper and lower bounds. FORMULA The upper limit is given by the debt limit under the best primary surplus i.e. surplus under the best realization of the shock and the lowest interest rate .e. the bets interest rate that government would need to make, making the assumption that creditors just change the risk free interest rate rather than with risk premium. If debt increases beyond this, the primary surplus increases slower than what i believe is growth adjust interest rate (whatever that is). Therefore if the debt goes beyond this limit, the primary surplus would not be enough, even under these best circumstances, to cover interest payments, and the debt dynamic would be explosive. Violating Assumption III (creditors are risk neutral)and the country would go into default

The lower bound of the debt limit is where the primary surplus under the worst realization of the shock is enough to cover risk free interest rate. As debt, at this point is not increasing in all realizations of the shock, there is no default risk and only rsik free interest rate will be charged. As this lower bound is equal to annuity value (equal amount of money paid each year) of the worst realizing of the primary balance at the risk free interest rate, it is corresponding to the natural debt limit which the macroeconomic literature (on savings under in complete markets) as large debt that a country can take up in order to ensure it never defaults in the next period of any time in the future, even if the primary balance remains in the worst realization forever.

Determination of the debt limit To determine debt limit within certain bounds, it is necessary to note that there is a debt ratio threshold that is corresponding to the maximum debt ratio (smaller than the debt limit), thus this ratio guarantees that the government will be able to pay i the next period, and the range of debt ratios is the range with which debt wt default risk is traded. (by construction) the probability of default in the next period is zero and therefore the interest rate charges in the market is te risk free

rate (by the Assumption III, creditors are risk neutral). As this debt ratio only guarantees payment in the next period, the debt limit guarantees payments for any future sequence of the realization of (primary) shocks. As the debt increases the market charges a positive risk premium . the equilibrium probability of default and interest rate is given by the solution of formula (8) FORUMLA The debt limit must satisfy two conditions. One is that as long as debt is at or below debt limit , risk neutral lenders will continue to provide finance at a positive finite risk premium. The other condition is that id the debt goes beyond debt limit, infinite interest rate cannot make up for the risk of default , the country looses market access and the probability of default is 100%. As primary balance is finite and so is the usprt of the shock, once debt goes beyond debt lit the government defaults. These conditions underpin the debt limit at equilibrium. The primary balance even in the best realization of the shock cannot help. This is similar to well know results by Eaton and Gersovit (1981), where risk neutral lenders that have a rationing limit at the debt threshold for every period. Above this threshold, no matter what the possibilities are for income realization in next period, the borrower defaults. In their determining the default probability is determined by strategic default decision rule , here the authors determine it by the ability to pay one period ahead. 2.3 a deterministic example

FOURMAL TALK After debt limit, no interest can compensate for the default, as default probability is 100% After the debt limit, the primary balance cannot be sufficient to pay interest, even at the risk free interest rate, therefore debt ratio increases without limit. Therefore the probability of default is zero until the debt reaches the debt limit after which it is 1 (100% ) or unity.

2.4 Properties of Debt Limit First, Decrease in GDP growth or increase in risk free interest rate, rotates the schedule, i think reducing conditionally stable long run public debt ratio, but raising the long run debt ratio to which the economy conditionally converges. Second, the increased willingness to undertake fiscal adjustment increases the debt lit and reduces conditionally stable long run public debt ratio Third, the equilibrium at the debt limit is dynamically unstable, where a positive are even a small negative shock to the primary balance (what is this shock anyway??????????????) would bring debt back to the long run debt ratio. Revaluation of support to primary balance shocks, lead to immediate

etsepeing of the interest rate schedule, and lowering of debt limit even when the shock has not be realized. This is because upside potential is small, even if there were large positive shocks t primary balance, the interest rate is pre determined and there is no benefit even to risk neutral creditors. But a large negative shock can cause default. Therefore downside matters more even for risk natural creditors and this could cause a suitable debt to become unsustainable.

Therefore data revision leading to higher debt being reported to markets can have two effects. The debt increases, which might trigger revision as to what market think of the support of shocks to the primary balance. Both can take the sovereign closer to default, as happened in south European countries.

III Empirical implementation: Applying the theoretical framework to 23 advanced economies between 1970-2007. The data includes gross public debt (why gross??) and primary fiscal balance, as percentages of GDP. Control variables are described below. Three steps are taken i-estimate the primary balance reaction function (how it reacts to debt i believe) ii-determine the appropriate interest rate growth rate differential. iii-finally calculating the debt limit for each country, as well as the associated fiscal space which here is the difference between current debt ratios and the calculated debt limit (within which the sovereign fiscal policy can manoeuvre)

i-(a)PRIMAYR BALANCE REACTION FUNCTION-Long discussion , as to limitations of their approach and all, e.g. limits of panel estimation is discussed ii-(b)Fiscal space. The authors look at it as the difference between the debt ratio at 2015 and the debt limit.

Likelihood of fiscal space: Consistent with the discussion above, the probability that Greece, Iceland, Italy, Japan, and Portugal have additional fiscal space is lowthough in a few cases, depending on the interest rate used, as high as 50 percent. Next are Ireland and Spain, where the probability that these countries have at least some additional fiscal space is around 70 percent (rising to more than 80 percent for Spain using the model-implied rather than the current interest rate). For the United States and the United Kingdom, the probability of any remaining fiscal space is around 7080 percent. For the other countries, the estimated probability of at least some additional fiscal space is greater than 85 percent Intuitively, the estimates of fiscal space depend on the debt level projected for 2015 and the debt limit, which depends on the countrys historical track record of

primary balances. Thus even a country with relatively high debt currently may enjoy additional fiscal space (and thus scope for dealing with unexpected shocks) if, in the past, it has acted fiscally responsibly, adjusting the primary balance once the shock has passed.. Then the author describes imitations of these

IV Conclusion: Paper contributes to existing literature on fiscal sustainability by proposing a new framework that concept and the notion of fiscal space, which is the difference between a countrys current debt level and debt limit. The authors concept of debt limit takes account of fiscal fatigue. Also one property that appeals is the character is that when a countrys economic growth rate or structural characters improve the debt limit increases as well, while the occurrence or recognition of the possibility of a negative shock can push sustainable debt to unsustainable debt The theoretical framework is applied empirically to 23 advanced economies between 1970-2007 and there is robust support for the fiscal fatigue characteristics. Specifically, it is found that marginal response of primary balance to lagged debt is non linear. It is positive at moderate debt levels but the response tends to decline when debt reached 90-100 % of GDP. Using these estimates wit exogenous and endogenous (model implied) interest tae, it is found out tat debt limits and their corresponding fiscal space differs greatly across countries. The debt limit for countrys ranges from 150-250% of GDP. The fiscal space estimates are limited or no fiscal space for Greece, Iceland, Italy, Japan and Portugal while there is ample space for Australia, Korea and the Nordic countries. Estimating the probability of positive fiscal space shows similar result, with Australia, Korea and Nordic countries are projected to have the higher probability of fiscal space while several southern European countries, Japan and Iceland have the lowest probability of having positive fiscal scale. The UK and the US are also constrained by the degree to which they can manoeuvre. However these estimates do not take into account the liquidity or rollover risks, or the possible realization of contingent liabilities (what??) Also, while the model the authors propose is a ne period model that takes into account endogenous interest rate, looking at longer-term debt and/or stochastic endogenous growth are possible avenues for future research.

From the view point of policy, the problaity estaimtes can be used to FLAG CASES where fiscal consolidation might eb urgently required in order to ensure that debt remains on a sustablibe path and thet shocks (WHATTT SHOCKS), includesing data revision, donot derail sustablaiuty.

http://econweb.umd.edu/~mendoza/pp/w16782.pdf

Paper continues with great explanation, but you can look at it later

However looks at this differently Blanchard O. (1990), Suggestions for a New Set of Fiscal Indicators. OECD, WP
No.69.

https://docs.google.com/viewer?a=v&q=cache:w-GhBdXJwfUJ:www.oecd-ilibrary.org/suggestionsfor-a-new-set-of-fiscalindicators_5lgsjhvj8bbp.pdf%3Bjsessionid%3D8kgugill95n28.delta%3FcontentType%3D/ns/Working Paper%26itemId%3D/content/workingpaper/435618162862%26containerItemId%3D/content/worki ngpaperseries/18151973%26accessItemIds%3D%26mimeType%3Dapplication/pdf+&hl=en&pid=bl& srcid=ADGEEShzoe4bTp2eLl0xjX980qouMDpEm0uJPzxbNOhlV1B0UnmBBhgziS4a7YbWz4GE57511eJyThmIfptwAy3DtPRJ5z3z8EBenEMXCOzGCxb1skC8nsX87WdziAayEJzxz4H25gs&sig=AHIEt bS8F-XLr3OLk0-BjjDu8RQz0qM41g Fiscal indictors, accordin to the author can be used to answer several questions, including, but not limited to, noting if the current fiscal policy s sustainable or weather an adjustment in taxes and spending is necessary as well as helping us look into the fiscal policys economic impact, through defecit and financing of det. (the other questions 1-from the change in a fiscal position of a ocutry, what is due to econmci environment and what is due to policy, 3- what is the effect of fiscal polcy on activyt (through is effects on prices, weather of labour or capital) THE DISCUSSION ON CAD IS NOT IMPORTANT, buT CAN BE USED BRIEFYLY e.g. we can say the author while discussing or cirtiuing limts f CADs use debt assessment, talked about BAH BLAH indictoars based n forecasting and preidtcions on budget etc The author notes taht OECD was using Cyclicially adjusted budget balance was being used as an indicator of fiscal policty, however any OECD members were dissatisfied with it and do nt view it as an index of the fundamental problems that they face. New research has also led many to question it usefulness. Also, CAD was used to assess alot more than it had originally been used for and therefore can be misleading, including but not limited to assessing fiscal policies sustainability.

(note: The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance. http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp478_en.htm) Note: A calculation of what the government's budget deficit would be if the economy was at a normal level of activity. This is achieved by assuming that the rules and rates concerning spending and taxes are unchanged........................... Read more: http://www.answers.com/topic/cyclically-adjusted-budget-deficit#ixzz2NkUVyDep)

As an index of fiscal policy sustaiablity it was used to asses wheather large defecits wuld disappear over time, as over the course cycylical movement will even out over the cycle and therefore cyclical adjusted defecit known in this context as surtucral defecit, without debt imploding/exploding and without changing taxation/spening or turning to monetisation or even repudiation

As it is looking into future, it doest account for factors that will make the future rather different e.g. the future of interest taes, inflatoion or other factrs influencing costs and revenues. Also as it is cyycicla adjusted measure, it ca assume a return to mid cycle, rather than looking at forecasts. It looing at sustaibauty , it is important to look at the economy perhaps 10 years down the line an dnot mid cycle point. A mid cycle correction can be interpreted as to mean that the eocnocy will return to the mid cycle position very quickly, which might not be the case.

Thereofre the indicators need to use forecasts and other predictable changes in the budget. It requires used of accounting identities, as well as forecasting movement in the future budgets, far into the future. The issue, is deciding how far? The indictors have to be simple, but as forecasts are being used, two indicators would be summed up to balance theoretical purity and potential acuracy.

The kind of questions that the indicators should answer are e.g. weather a country can go on with te fiscal plciy or if we would have to change income/expenditure or look at other means to reduce debt. If ajdustmens ar ereuqired, what are the costs of delaying it. Also weather a country can safeult reduce ts current fiscal surplus by reducing taxes or would it need to increase them in the future?

EXPLAIN BUDGET CONSTRAINT! And then Essentially carries the discussion forward from budget constraint and says that , as the preset vae pf primary surplus must be equal to the intial level of debt, it can be satisfied by taxing, spending, monetisation or repudiation (how does that happen). To note whether the adjustment required would be huge, look at spending and transgers in terms of GNP and note whetahe trh current constant tax is sustainable. The difference between the current and sustainable tax can give an indication of future sustainability. [[SIMILAR TO MAIN, GAP, but they talk about GAP later actually]] . A sequence of taxes and transfers wold also show sustainle speding. We would know the sustainle transfer rate given the sequence of spening and taxes. As taxes are mst likey to be adjusted, it is best to focus on Taxes (WHY??? What does the author mean??). IN terms of taxes, a posistiev diference ca be good or bad depending o country. If taxes are too low, a mid course correction might be required, however if they are already too high, a positive difference means risk of crisis and perhaps mnetsiation or some form of repudiation would be needed. This is one indictaor, however it cannot be consurcted, the value of discount rate (real interest rategrowth or discount rate) is small which means one needs to make projectsion of govbernmnet spending and transfers far in the future far beyond accuracy. And therefore author suggest the next three more acucurate indidctaors 1The simplest indicataor, not requiring forecasts can be called primary gap (LIKE MAIN!!! CHECK) it si equal to (d+ (r-0)b) the primary surplus minus the debt to GNP ratio multiplied by the difference

between the real interest rate and the growth rate. Better to use constant values for r-0 , say averga eof 10 years, however it is primitive as it takes no account of predictable changes from preitcibale changes in the economy or in the polcy. The next indicators are more amobtious but reply on forecasts. 2The second indidctaor can be called medium term tax gap (t3*-t), the average over the current and the next two years of spending and transfers as ratios to the GDP, plus the ratio of debt to GDP times the interest ratecminus the growth rate, minus the tax rate. The choice of three years is rather arbitrary: the idea is to construct the indicator sing available projection of government spending and transfers andthe longest span of time for which such projections are available should determine the choice. 3Another indictaor is, cal it long term tax gap to use the average of the primary gap over the current and the next two years based on forecasts of spending and teaxe sove rth bext two years both indicators take into account predicted cycilical movement which are revealed by the first indicator None of the above take into the more distant future, as recent work by OECD shows on bg the impact of changing composition of the population can be on the budget n the next 30-50 years.

The author says that he has used three indidctaors, one is myopic, one is near future and one is distant future. E sees the second index as the one OECD should concentrate on in

its discussion fo fiscal policy. The first should be computed and reported due to non reliance on forecasts. Thethrid shoud be computed to detect more distant contengcies, but its conrtcution is more in the nature of academic endeavour (rather than policy i guess) SOMETHING SIMILAR TO WHAT I SAID AFTER MAIN, ie.
Different indicaors can be used at different times for different reasons e.g. using tools/indicators, to predict far off, and to predict immediate defalt etc or It can even be related to what MAIN talks about conceirng time horizon i guess T o recap, the inictaors are: 1-primary gap: defined as the primary surplus as a ratio of GNP minus the debt to GNP ratio mutlipled by the dfferec between the real interest rate and thr growth rate. The other two are forwar looking measures. 2-The second is the medium term tax gao, defined as the average of the smun of govnermnet spending plus transfers as ratio to GNP over the current and the following two years. Plus the debt to GNP ratio multiplied by the differenc between the real interest rate and the growt rate, minus the currecnt tax rate. 3-The third is the long long run tax gao, defined as the average of the sum of govenrmnet spenindg plus transfers, as ratio to GNP, over the next 50 years pus the debt to GNP ratio multiplied by the diffeenc between the ral interest rate and thr growth rate, minus the currecnt tax rate.

http://ideas.repec.org/p/cpr/ceprdp/437.html

National Insolvency: A Test of the US Intertemporal Budget Constraint-

BASics can go here, the technique can go in EMPRIRICAL....maybe.

If a country is not able to satisfy its intertemporal budget constraint (IBC) then it can become insolvent or consume more of its own income. The paper attempts to establish necessary and sufficient conditions for a country to satisfy its intertemporal budget constraint which is then used to test if the US is meeting those conditions or not. Modifications are made to techniques available in literature e.g. government budget constraint is replaced by balance of payments. The analysis provides new results as well as generalization to existing ones.

MORE OF THE ARTCILE NEEDS TO BE READ you can read more

The sustainability of current account deficits : A test of the

US intertemporal budget constraint->BASics can go here, the technique can go in EMPRIRICAL....maybe.
The paper shows a new method to determine if a country is likely to sustain its current account deficits without defaulting on debt (EXTERNAL DEBT!!!)
It is based on the concept of national intertemporal budget constraint, which is derived from a forward solution of the balance payments identity. Although the literature has looked at it , the paper obtains a more general solution as it allows the primary deficit to be endogenous and not exogenous (WHAT!!!??). The paper shows that the wealth effect, ie the existence of negative feedback from net indebtness to primary deficit. The method replaces the ad hoc approaches seen in the account literature, and even though similar variables are used, a more formal structure of analysing them is used here. MORE

OF THE ARTCILE NEEDS TO BE READ

you can read more

Here or in empirical ??-->

How to Assess Public Debt Sustainability: Empirical Evidence for the Advanced European Countrieshttp://www.rjfp.ro/issues/Volume2_Issue2_Curtasu.pdfmake shift definitions and

indictaors have been relied upon by authors and researchers, rather than a clear theoretical benchmark, as there exists none.-->continue in indicators. The OECD uses cyclically adjusted budget balance (CAB) as an indicator of sound fiscal policy (this

has been critiqued by me in another paper) Olivier Blanchard in his 1990 (i might have this paper) paper, Suggestions for a new set of fiscal indicators has mentioned
the pros and cons of using CAB and considers using a single index as not being sufficient to such an assessment, instead, he recommends that the ECD emphases its assemsment of fiscal policy through the following indidcators: a. An index of discretionary change, which approximates what part of change (CHANGE IN WHAT) is due to economic environment and what is due to a change in policy (I HAVE LOOKED AT IT IN ANOTER ARTCILE) b. Three indictaors of debt sustainability i.e. the primary gap, medium term tax gap and the long run tax gap c. Three indicators for fiscal impact i.e. inflation adjusted defecit, the level of govenrmnet expenditure (includes real interest payment on debt, minus average tax rate of this year and the next two). The third indicatr being an index tat should reflect effects of retirement programs.

The confusion in a clear benchmark of sound fiscal policy is also apparent from the way the European Unions own fiscal rules. The Treaty of Masstricht enforced from 1993 defined a critier for countrys eligibility of joining the EMU. The criteria for deficits and debt (which debt) to GDP ratios were 3 % for planned or actual government deficit to GDP, at market prices. 60% for government debt to GDP at market prices In 1997, a the European Council accept a draft resolution of the Stability and Growth pct, which is a framework used to coordinate the different national fiscal policies among EMU members. It make the Treaty more definitive and operational and enabled protecting sound public finances among the members, something that was necessary to ensure proper EMU functioning. The pact has a two arms. Under the preventive arm provisions, members must a submit a stability and convergence program every year to show how they plan to achieve or protect the already sound fiscal position in the medium term, while taking into account the budgetary impact of ageing . The second, dissuasive arm governs excessive defecit procedure (EDP, where if the deficit exceeds that which has been defined by the treaty, the council would issue recommendations for it to be corrected in a certain time. In case members do not comply, further steps are taken according to the procedure including possible sanctions by Euro Area member States. Long term public finance sustainability is also considered while assessing countries in the stability and convergence program (Treaty of Masstricht or Stability and Growth Pact????????????)

The European population would undergo a massive demographic change in terms of size and age. An ageing population would create huge, social, budgetary and economic problems. A European Commission special report concluded that in light of such developments EU government debts under current policies would rise significantly in coming decades. Fiscal consolidation as well as broad based economic reforms would be needed for the ageing population problem. Making lasting budget adjustments in such a way would significantly improve fiscal sustainability.<--where

can this go??, maybe introduction or importance of sustabiakut BEYOND the current debt crisis
The IMF is another instistuion, encouraging states to take up sound economic and fiscal policies. The IMF with the World Bank promote resilient financial systems globally through their Financial Sector Assessment Program (FSAP). The IMF and world bank staff, along with Experts from national agencies and standard setting bodies work on the FSAP and assess the stability of a govenrment;s financial system , by identification of strengths, weaknesses and how key sources of risks are currently being managed and also analyse the financial sectors development needs and help in prioritizing policy responses.<-Almost copy of what was written in article, try to change into own words

The main instrument used by the IMF was created in 1952 and upgraded (maybe I should say revised) in 2009 to lend is the Stand-by-Arrangement. Subject to relevant IMF policies, ember countries that are needing external financing are eligible for the SBA. The time frame is flexible, usually between 1-2 years but not above 3 years. The new SBA framework (I believe adopted in 2009) has increased the range of High access precautionary arrangements (HAPAs) which are a kind of insurance facility against massive financing needs. During the financial crisis, three HAPAs were approved, with Costa Rica, EL Salvador and Guatemala. 3. Empirical Evidence of Investigation the Public Debt Sustainability According to literature, classical methods of investigation can be divided into the following categories: 1-Stationar or unit root tests 2-cointegration tests and 3-fiscal reduction tests AND SO ON...THIS CAN GO IN EMPRICIAL

Continue later in article, but i think more

empirical stuff

EXCELLENT STRATER ARTCILE---MUST READ WHOLE!!!!! A MUST (good see abstract from original if need idea) http://www.ecb.int/pub/pdf/other/art1_mb201204en _pp55-69en.pdfANALYSING GOVERNMENT DEBT SUSTAINABILITY IN
THE EURO AREA
The experience in the Euro Area during the financial crises has shown that such downward spiral accelerates if these negative assessments by credit agencies or whoever negatively impacts balance sheet of banks and ultimate results in higher deleveraging needs to meet the core capital requirements (why is that bad? Because its due to market and not fact?). Overall the problem is made worse (compounded is the word the author uses) when it is all added up. higher bond yields, impacting banks funding needs and therefore borrowing costs for private sector, eventually affecting private sector investments and economic growth. In light of all this, the article looks into three questions. What is the conventional/usual/standard debt sustainability analysis is able to deliver? How can improvement be brought to the tool tat are being used to asses debts sustainability analysis In light of the tool already available for debt sustainability analysis, what can be concluded from the current fiscal polices of the Euro Area. Section 2 will look at the increase in government debt and the subsequent rise in bond yields, in the Euro area since the financial crisis begun. Section 2, looks into debt sustainability, the foundations of conventional debt sustainability analysis as well (based on illustrative results for the Euro Area aggregate<-what does that mean) as its pros and cons. Section 4, then recommends possible additions to this analysis which takes into accounts the risks related to contingent, implicit and other off budget liabilities. Section 5 goes on to look at an alternative approach to debt analysis, which is more model based analysis. Section 6 would look into early warning mechanisms of fiscal stress, specifically short term fiscal risks. Section 7 then concludes the paper by mentioning the high uncertainty associate with medium term debt sustainability assessments, because of which there is a need for stronger focus on short term public finance developments as well as fiscal prudence in the whole of Euro Area.

PRIMARY BALANCE, PUBLIC DEBT AND FISCAL VARIABLES IN POSTSOCIALIST MEMBERS OF

THE EUROPEAN UNION While looking at public debt, borrowing costs are impacted by such fiscal variables as primary fiscal balance, the amount of outstanding debt, inflation and growth, in industrial countries. In particular, debt servicing costs reduce as the balance improves, thereby increasing the impact of primary adjustments on the condition of state finances. This relation is very much observable among the 10 new EU countries, however the variation in debt servicing costs can also be related to fundamentals.

According to the author, one way of looking at debt sustainability is to look at the relationship between fiscal policy instruments and the objectives of fiscal policy. The primary fiscal balance is being seen as the key operating target (policy objectives I believe) of the government and it is assumed that it responds to public debt and is also affected by temporary factors such as the business cycle, wars, inflation etc (WHATIs primary balance a target or an instrument???? I cant understand man)

IMF Working Paper IMF Institute Assessing Fiscal Sustainability: A Cross-Country Comparison Prepared by Enzo Croce and V. Hugo Juan-Ramnl July 2003 A fiscal policy is deemed unsustainable when it moves the government away from solvency and therefore a good starting point to check for fiscal sustainability is to determine if the conditions for solvency are being met. According to theoretical literature this would mean having a forward looking approach involving projections of taxes and spending, GDP growth rates, real interest rates etc in order to determine whether the intertemporal budget constraint is being satisfied.

EC (2006), The Long-term Sustainability of Public Finances in the European Union. Brussels: European Commission (all about government debt) Summary:
a few lines.

read yourself. But just

They have looked at several factors. Looked at expenditure and revenue forecasts.

Even though sustainability indicators are necessary tools to asses long term public finance sustainability, an overall assessment requires taking into account other factors as well. The sustainability indicators themselves includes explicit debt and implicit liabilities but does not include any information on contingent liabilities, that have the potential to increase burden on public finances if they ever materialise. Although the impact of contingent liabilities is small on the sustainability indicators, it can be large on debt, however due to a lack of data the paper doesnt systematically use this for the analysis.

As discussed by Main Article and others above, Debt/GDP is an important factor while assessing long term sustainability of public finances. A situation has become unsustainable if the Debt/GDOP reaches beyond a point after which issuing new debt becomes difficult (i think solvency issue). This maximum level of debt after which the situation is considered unsustainable is not defined before it occurs (although ABOVE WE HAVE A PAPER WHICH ATTEMPS TO FIND IT OUT), sustainability therefore in this case is measured by looking at the dynamic over time, superficially looking at whether the debt is stable, decreasing or increasing. The current debt level, Apart from already being a part of long term debt projection, on the basis of which the sustainability indicators are calculated, can provide even more information on the sustainability of public finances, particularly when one considers the following facts

-Countries that are high in debt are more vulnerable to interest rate/growth rate shocks due to an increase interest burden or a deteriorating underlying budget balance. If such a shock occurs in the near future, countries could rapidly accumulate even more debt and put the sustainability of public finance in the medium term into trouble. Also, investor might require higher interest rates as risk premium, thereby furthering risks to public sector sustainability. -High-debt countries also need to maintain primary surplus over the long term in order to reduce their debt. However this can be difficult due to competing budgetary pressures, interest is a substantial burden and can require the primary surplus to be even higher if debt is to be successfully reduced.

-Sustainability indictors do not taken account of any information relating to recent history of debt dynamics. Analysis of development of debt over the time before the starting point (for the assessment I think) helps to qualify the risks of sustainability with relation the possibility of the likely of the planned government debt path over the medium term. This is specifically relevant to the case where government debt has increased very quickly, even when from moderate debt levels, where it has been relatively high and increasing or has not been declining at a satisfactory pace -In context of the EU fiscal framework, member countries are obligated to avoid excessive budgetary deficits and respecting the two criteria of budget discipline. One if the deficit criterion and the others is the debt/gdp criterion which would not exceed 60%, unless if it is sufficiently decreasing and approaching the 60% mark at a satisfactory rate (as defined in Article 104 of the Treaty and in the protocol on the EDP annexed to the Treaty.) Assessment of the long-term sustainability of public finances in the context of the EU budgetary surveillance qualifies the situation with regard to respect of the Treaty reference value for government debt.WHAT?! Umair here

-Conclusion : Deprnding on above, thete is no one best,but give suggestions. Ur thouggts shoukd be seen. Per0as this could lead into IMF!
There is a suggested type of conclusion I wrote in beginning

-EMPIRICAL:

IMF Working Paper IMF Institute Assessing Fiscal Sustainability: A Cross-Country Comparison Prepared by Enzo Croce and V. Hugo Juan-Ramnl July 2003 Empirical literature is basically divided into two main approaches of assessing sustainability in real practice i.e. through sustainability tests and through sustainability indicators. Sustainability tests are back looking and their purpose is to verify if solvency conditions (the author discussed solvency as earlier, but says sustainability requires solvency under policies that do not have to be adjusted) have held for budget polices in the past. This information is used to infer lessons for the future. The results of such tests however have not been consistent, even when applied to the same countries and time periods. The reason is that the tests are very sensitive to quality and quantity of data as well as the statistical procedures used. The biggest drawback however of such tests is that it is past looking, and solvency under certain policies in a given time period does not ensure solvency in the future.

Looking at indicators, Buiter (1985) and Blanchard (1990) MUST READ gave several proposal of using synthetic indicators to measure sustainability where interpretation of the results are simplified. The basic criteria in most of these indicators was to note whether the current polices can stabilize (non deteriorating) public sector new worth/GDP ratio (based on Buiter) or the debt/GDP ratio (Blanchard) (several authors have discussed this, including the main article). The drawback with Public sector net worth to GDP ratio is the difficulty in obtaining reliable information which is why many studies prefer using debt to GDP instead. The calculations rely on projections of government revenue and expenditure based on current polices. The estimated primary deficits and tax ratios are compared to the permanent primary deficit (primary gap indicator) or the permanent tax ratio (tax gap indicator), which is required in order to keep the debt to GDP ratio constant. The gaps identified as a result provide a measure of the sustainability of current fiscal policies. SAME AS MAIN...i.e. primary deficit and tax deficit is

estimated and compared to primary gap and tax gap required to stabilise the ratios. The size of the gap helps determine sustainability. However the drawbacks or limitations of SIMPLY using this approach have been discussed in the main article. The paper proposes an operationally simple recursive algorithum that i derived from the law of motion of debt/gdp ratio, subject to the governments reaction function (how government fiscal policy reacts to debt as discussed in an earlier article

http://econweb.umd.edu/~mendoza/pp/w16782.pdf) . The author seems to be

saying that an algorithm is devised from the way debt/gdp ratio moves, which in itself is determined by the way the government (governments fiscal policy) reacts to primary deficits. The actual debt/gdp goes beyond the governments target, the government reacts by creating a primary surplus which is in line with convergence of the debt ratio to that target (it creates a big enough surplus to meet that target, this is the governments reaction *function+). Once achieved, the algorithm is expected to anchor the polices in order to make sure that the targeted ratio is maintained (HUH?? WHAT!!). The author seems to be saying that after a government has reacted, the algorithm would calculate what it would need to do to maintain the target debt/gdp ratio. The sustainability indicator created from this framework is similar, even though a bit more general than the one proposed by Blanchard (1990), however one advantage of this indicator is that it does not aim to make estimates of future GDP or interest rates. Only present, past and target values of the appropriate variables. An indicator such as this that is easy to calculate and can be updated regularly e.g. on a quarterly basis, can help improve fiscal transparency , of course as long as the way the algorithm evolves and convergence to the (target) debt/gdp ratio can be monitored by the public. The government will not need to explain its reaction function or any discretionary measures that it takes if it announces that it will is committed to keep the algorithm, on average, within the convergence region and making this commitment easy to check. Such a fiscal policy would be related to the monetary policy strategy that is undertaken to target a specific inflation rate. Having a targeted debt/gdp ratio also requires the government to be committed to consistency in policy and as a result will follow a rules-based strategy. However, at the same time it would be on government discretion (judgement) on how to deal with unexpected shocks.

The importance of identifying criteria in order to assess fiscal sustainability has been discussed in an IMF paper (http://wWw.imf.org/external/np/odr/sus/ZOOZ/eng/OS2802.Ddt`) which. To assess fiscal sustainability, the paper undertakes, baseline medium term projections (making sure there is clarity and consistency in the assumptions used) as well as stress tests for deviations for the baseline. The author considers it very important to monitor how key indicators evolve on a permanent basis, which is why the authors recursive fiscal sustainably indicator complements projection scenarios and therefore add an important input to assessing sustainability. An example can be that an improving baseline projection might occurs simultaneously with deteriorating indicators, which would make the government revise baseline projections or make a case for deteriorating current indicators.

The IMF paper also emphasises, like this paper, that in order no matter model is used to assess sustainability , it is important to have appropriate coverage, good quality and timely data is necessary.

In order to test if the algorithm will work in practice, quarterly values for indicators throughout the 1990s were calculated for a diverse set of countries in terms of public indebtedness and composition, variations in public expenditure and macroeconomic stability. All of the countries in the set, apart from the US, experienced a currency crisis in the 1990s, which was followed by fiscal consolidation efforts and therefore also help to test the indicators in different conditions. Based on behaviour of the indicator, countries are then classified according to the degree of sustainability. Unsustainable countries it was found experience larger increases in certain public expenditure categories as a percent of GDP-(wages, subsidies and other current transfer) relative to countries which were found to be sustainable. Empirical?!

II. CONCEPTUAL AND OPERATIONAL FRAMEWORK BELOW Too many clauclations here for the purpose of the study and MIGHT NOT BE GOOD EVEN FOR EMPRICIAL, however he discusses some things that might be reasonable for discussion on sustainability. MARK THEM Looking at fiscal sustainability and solvency, the author proposed assessment in the context of the intertemporal budget constraint of the public sector.

I think it also says that in absence of any shocks or corrective policies, debt will increase over a period of time if there are persistent primary fiscal deficits together with a real interest rate higher than the growth rate (which would increase the primary gap (Primary surplus to GDP ratio)

Condition for solvency is when present discounted values of future primary surpluses is equal to the value of outstanding debt. In preset value terms therefore, the public sector cannot be a net debtor. At some point in future therefore the primary balance has to be come positive. (Remember from above though must be remembered though that solvency is a necessary condition for fiscal sustainability but solvency only requires that the debt be fully repaid at some point in future and not that the budget constraint is satisfied. However sustainability requires solvency under policies that do not have to be changed (means no adjustments are made) that is, that the budget constraint also had to be satisfied , together with the government being solvent.) More pragmatically however the author uses less strict conditions for solvency (drm is equal to 0 dt)

And the present value of expected primary surplus ratios will reduce the debt ratio below the current level The operational recursive algorithm that we propose in the next section is akin to this concept This criterion for solvency ensure that the intertemporal budget constraint is satisfied representing a necessary condition for fiscal sustainability. However policy prescriptions cannot be based on these expressions. The main problem is that all the variables are endogenous (originate within the country) and therefore fiscal measures impact on growth may affect the government own revenues and expenditures, interest rates as well as private saving and investment behaviour. In contrasts to this solvency indicator assume (implicitly)that the projected trajectories of the primary balance, interest rates, economics and inflation are all independent (of what? Of each other?)Therefore we need some assumption on the behaviour of these variables in order to assess whether the current fiscal policies adopted are sufficient for sustainability. At the same time, shocks that impact income growth and interest rates might affect the ability and willingness of governments to start fiscal consolidation to satisfy intertmperoal budget constraint (the political issues are discussed in the MAIN ARTCILE AS WELL, POLITICAL ISSUES MIGHT HAVE A SEPERATE SEGMENT). The indictor however proposed by the author does try to overcome all these limitations B. Fiscal Sustainability: A11 Operational Recursive Algorithm detail on the test done can be found under this section in Draft 4 and you can do it later on.

http://www.ieo-imf.org/external/pubs/ft/dsa/index.htm

Debt Sustainability Analysis

Introduction
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A new LIC DSF template, recently posted, offers new features: the inclusion of the external and fiscal DSAs in one template and the possibility to select another foreign language (French, Spanish, and Portuguese).
In the context of IMF supported programs and surveillance, the advice on macroeconomic polices by the fund is based on the analysis of a countrys capacity to finance its policy objectives and servicing the subsequent debt, without the need for large adjustments that might negatively impact stability. For this the IMF has developed a framework to conduct DSA (public as well as external debt) in order to better detect, prevent as well as resolve possible crises. The framework has been operational since 2002. There are three objectives of the framework: 1-To assess the current debt situation of the country, look at its maturity structure, note whether the rates are fixed or floating, whether the debt s indexed and who holds it 2-Early enough identification of weakness and vulnerabilities in the present structure of debt or policy framework so that policy corrections can be implemented before there is difficulty in payments 3-Where payment difficulties have or are about to occur, the DSA would help examine impact of alternative debt stabilizing policy paths.

The analysis of the sustainability of total public and total external debt make up two complementary parts of the framework Both the parts of a baseline scenario based on a set of macroeconomic projections that reflect the government proposed policies, with assumptions and parameters clearly defined. A series of sensitivity tests are applied to the baseline scenario as well in order to provide a probabilistic upper bound for debt dynamics in various assumptions of policy variables, financing costs and macroeconomic developments that might occur The paths of debt indicators under the baseline scenario and the stress tests allow to assess the vulnerability of the country to a payments crisis. [this is same I think as below where it says The analysis is conducted under a baseline scenario, which reflects the intended policies of the authorities and a group of alternative scenarios that aim to stress-test the baseline]. DSA result must not be interpreted in a rigid manner, rather should be assessed under relevant country-specific circumstances such as specific features of the countrys debt, past track record of its policies as well as the policy space. For this reason differing frameworks have been designed for market-access countries and for low-income countries. Both frameworks have been refined and updated on a regular basis with a view to (among other things) bringing a greater discipline to the analysis and responding to the changing economic and financial environment.

Assessing sovereign debt under uncertainty - article of ... - CiteSe http://www.ieo-imf.org/external/pubs/ft/dsa/mac.htm <-maybe on empirical practical side. I should look at theory for now.

Debt Sustainability Analysis for Market-Access Countries

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The IMF uses a systematic approach to assess the sustainability of public as well as external debt. The approach considers market-access countries , with significant access to international capital markets (why only internatonal??), to be different from low income countries which have relatively limited access and meet external financing needs mostly through concessional resources. The sustainability assessments for both categories of countries are conducted in the context of IMF program design and Article IV surveillance, performed using standard templates.
>> can go into important of debt sustainability assessments, we can even mention that this is the need for assessments for IMF. Such assessments of the sustainability of debt help to analyse whether the debt paths in a proposed policy are sustainable or not. For this, debt ratio dynamics and trajectories are assessed in order to determine if the solvency and liquidity conditions are being met. The analysis is conducted under a baseline scenario, which reflects the intended policies of the authorities (government authorities or IMF or Euro Supra national? What) and a group of alternative scenarios that aim to stress-test the baseline.

This framework was introduced in June 2002 (see "Assessing Sustainability") and subsequently refined in June 2003 and July 2005 (see "Sustainability AssessmentsReview of Application and Methodological Refinements" and Information Note On Modifications To The Fund's Debt Sustainability Assessment Framework For MarketAccess Countries). Using a standard template, Debt sustainability Analysis (DSA) for market access countries is undertaken (conducted is the word in the paper) ever year. They are a part of the annex in the Article IV consultation reports (which can be found by country. For further details on DSAs for low-income countries click here.<<- Click it and see NOT AVAILABLE

*Also look at Staff Guidance Note on Debt Sustainability Analysis for Market Access Countries http://www.imf.org/external/np/pp/eng/2008/07030>-maybe did earlier -Debt Sustaibaty framework-http://www.imf.org/external/pubs/ft/dsa/index.htm (debt sustainability assessmentexcel file) I have an excel sheet but I think now they have something new: And i thnk it goes well beyong vriteria 3b i.e. looking at the prole by looking at flows. It covers what I cae up with i..e looks at long term and immediate.

It notes a counrtys capacity to finance policy and service debt without making large adjustment which would make it unstable. To assess this the IMF has this framework for public as well as external debt sustaiblity analyses operating since 2002. This helps IMF, detect, present and resolve whatever financial crises may occur. There are three objectives

-Look at the current debt situation, its maturitry ctructure, if it is indexed or not, who holds it and whether it has fixed or floating (interest) rates. -Secndy advance identification of vulnerubities in the identify debt structure or the policies such that policy changes can be introduced before diffuclty in payment arises -thirdlyIf payment difficulties have or are about to become a reality, assess impact of altertave debt stabilizing policy paths.

There are two complementary components to the framework. While looking at sustablity of total public and external debt, there is a baseline scenario resulting from macroeoccix projections reflecting govenmnet polcies. The assumption and parameters are stated. Then there are several

senssvyt tets applied to this scenario, which provide a probable upper bound for debt dynamic under the assumed polcity variable, macroenocmic developments and financing costs.

The paths of the debt indicators under this baseline scenario and the stress test allow to asses how vulnarbale the country is to payment difficulties or crisies. However IMF states that the debt sustaablity assesent shoud not be seen viewed in a rigid manner and each result soud be assessed in ligt of each counrtys specific cirumentsance including paticual features of its dbet, track record of pcocies as well we the polci space. Which is why there are two different sistables assement, one for market acces countries and the other for low income countries (in folder). The framwoks are refined regulsryly one of the reason for which is to ensure greater dispcine in the anlsysis as well as to respond to and consider the contnusly chaging eocmc and finaical envrimnment

DSAs for market-access countries are conducted annually on the basis of a standard template. They are included as an annex in Article IV consultation reports, which can be found by country. http://www.imf.org/external/country/index.htm-->LOOK AT GREECE AND COMPARE!!!

8a.pdf

*old and not updated, but still view ad see the links on the left hand side Vulnerability indicators http://www.imf.org/external/np/exr/facts/vul.htm