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A Risk-Based Debt Sustainability Framework

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Author Info

  • Dale F. Gray
  • Elena Loukoianova
  • Samuel W. Malone
  • Cheng Hoon Lim

Abstract

This paper proposes a new framework for the analysis of public sector debt sustainability. The framework uses concepts and methods from modern practice of contingent claims to develop a quantitative risk-based model of sovereign credit risk. The motivation in developing this framework is to provide a clear and workable complement to traditional debt sustainability analysis which-although it has many useful applications-suffers from the inability to measure risk exposures, default probabilities and credit spreads. Importantly, this new framework can be adapted for policy analysis, including debt and reserve management.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/40.

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Length: 25
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/40

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Related research

Keywords: Debt sustainability; Risk management; Public debt; Reserve management policy; currency debt; foreign currency; foreign currency debt; risk premium; debt ratio; debt sustainability analysis; traditional debt sustainability analysis; external debt; debt structures; reserve management; debt management; public sector debt; interest payments; external volatility; subordinated debt; sovereign borrowers; sovereign debt; currency risk; currency composition; external shocks; debt dynamics; debt obligations; external shock; domestic currency; central bank; sovereign default; currency composition of debt; real interest rates; investors; debt ratios; maturity structure of debt; foreign debt; debt management operations; outstanding debt; reserve holdings; private creditors; debt restructuring; sovereign borrower; commercial debt; market debt; debt manager; investment management; government deficits; debt crises; debt portfolio; debt managers; debt maturity; nominal interest rates; balance sheet effects; government debt; debt service obligations; debt intolerance; currency compositions; balance sheet information; domestic debt; debt service; debt maturity extensions;

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References

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  1. Peter Rowland & José Luis Torres Trespalacios, 2004. "Determinants Of Spread And Creditworthiness For Emerging Market Sovereign Debt: A Panel Data Study," BORRADORES DE ECONOMIA 002337, BANCO DE LA REPÚBLICA.
  2. Genberg, Hans & Sulstarova, Astrit, 2008. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 26-39, February.
  3. Samuel Malone, 2005. "Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model," Economics Series Working Papers 246, University of Oxford, Department of Economics.
  4. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  5. David W. Wilcox, 1987. "The substainability of government deficits: implications of the present- value borrowing constraint," Working Paper Series / Economic Activity Section 77, Board of Governors of the Federal Reserve System (U.S.).
  6. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  7. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  8. Michael Gapen & Dale Gray & Cheng Hoon Lim & Yingbin Xiao, 2008. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 109-148, April.
  9. Luis Catão & Sandeep Kapur, 2006. "Volatility and the Debt-Intolerance Paradox," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 1.
  10. repec:rus:hseeco:123922 is not listed on IDEAS
  11. Christian Keller & Peter Kunzel & Marcos Souto, 2007. "Measuring Sovereign Risk in Turkey," IMF Working Papers 07/233, International Monetary Fund.
  12. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis," IMF Working Papers 04/121, International Monetary Fund.
  13. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
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Citations

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Cited by:
  1. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2011. "Measuring and Managing Macrofinancial Risk and Financial Stability: A New Framework," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 5, pages 125-157 Central Bank of Chile.
  2. Serkan Arslanalp & Yin Liao, 2013. "Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors," CAMA Working Papers 2013-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Andreas Sachs, 2013. "Governance Structures in Europe," WWWforEurope Deliverables series 2, WWWforEurope.
  4. Zaman, Gheorghe & Georgescu, George, 2011. "Sovereign risk and debt sustainability: warning levels for Romania," MPRA Paper 32924, University Library of Munich, Germany.
  5. Martin Cihák & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.
  6. Bas van Aarle, 2013. "Surveillance and Control of Fiscal Consolidation on a Supranational Level," WWWforEurope Working Papers series 46, WWWforEurope.
  7. Paolo Panteghini, 2008. "Corporate Debt, Hybrid Securities and the Effective Tax Rate," CESifo Working Paper Series 2329, CESifo Group Munich.
  8. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
  9. Nuno Silva & Nuno Ribeiro & António R. Antunes, 2011. "Towards a CCA-based Systemic Risk Indicator," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  10. Nuno Silva, 2010. "Inter-Sector Relations in the Portuguese Economy: an Application of Contingent," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  11. Evan Tanner, 2013. "Fiscal Sustainability," IMF Working Papers 13/89, International Monetary Fund.
  12. Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," Working Papers Central Bank of Chile 541, Central Bank of Chile.

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