IDEAS home Printed from https://ideas.repec.org/p/bae/wpaper/011.html
   My bibliography  Save this paper

The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies

Author

Listed:
  • Ata Ozkaya

    () (Galatasaray University Faculty of Economics and Administrative Sciences)

Abstract

The question whether a government’s fiscal policy is consistent with an intertemporal budget constraint has been motivated a number of empirical studies. The econometric approach focuses on the circumstances under which a government is able to sustain its budget deficits without defaulting on its debt. In this contribution, by linking the different motives on long-run sustainability of public debt, we develop a compact step-wise test algorithm and apply that to the PIIGS countries and United Kingdom. Secondly, we introduce phase-space reconstruction methodology in order to locate the path for debt dynamics, which enables us to observe fiscal policy implications in short and medium-term. We conclude that Greece, Ireland, Portugal are characterized by unsustainable debt policies. For Italy, Spain and United Kingdom, we could not reach clear cut results. For those economies while the outcome of test algorithm indicates the sustainability of debt policy, phase-space examination shows that the reaction of the governments to diverging debt stock GDP ratio cannot be sufficient to stabilize the path for debt dynamics. Last, we measure relative credit ratings of 25 OECD countries, including Turkey and eurozone economies. Our measurement method is based on the fundamentals used for measuring public debt sustainability: GDP per capita, change in Consumer prices (CPI), and GDP ratios of; General government budget balance, General government primary balance, General government gross debt stock, Current account balance, Public foreign currency debt stock. For each country, these seven inter-related criteria are examined during three non-overlapping periods: 2005-2010, 2011 and 2012-2013. We conclude that the countries that have trouble with debt sustainability have overestimated sovereign credit ratings and hence they will eventually be revised.

Suggested Citation

  • Ata Ozkaya, 2013. "The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies," Working Papers 011, Bahcesehir University, Betam.
  • Handle: RePEc:bae:wpaper:011
    as

    Download full text from publisher

    File URL: http://betam.bahcesehir.edu.tr/tr/wp-content/uploads/2013/04/WorkingPaper011.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Joakim Westerlund & Silika Prohl, 2010. "Panel cointegration tests of the sustainability hypothesis in rich OECD countries," Applied Economics, Taylor & Francis Journals, vol. 42(11), pages 1355-1364.
    4. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    6. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-445, July.
    7. Corsetti, Giancarlo & Roubini, Nouriel, 1991. "Fiscal deficits, public debt, and government solvency: Evidence from OECD countries," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 354-380, December.
    8. Husted, Steven, 1992. "The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 159-166, February.
    9. James Payne & Hassan Mohammadi & Murat Cak, 2008. "Turkish budget deficit sustainability and the revenue-expenditure nexus," Applied Economics, Taylor & Francis Journals, vol. 40(7), pages 823-830.
    10. Buiter, Willem H. & Patel, Urjit R., 1992. "Debt, deficits, and inflation: An application to the public finances of India," Journal of Public Economics, Elsevier, vol. 47(2), pages 171-205, March.
    11. Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2004. "Searching for threshold effects in the evolution of budget deficits: an application to the Spanish case," Economics Letters, Elsevier, vol. 82(2), pages 239-243, February.
    12. Nigel A Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
    13. António Afonso, 2005. "Fiscal Sustainability: The Unpleasant European Case," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 1-19, March.
    14. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-271, February.
    15. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    16. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-223, May.
    17. Gael M. Martin, 2000. "US deficit sustainability: a new approach based on multiple endogenous breaks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 83-105.
    18. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    19. Tanner, Evan & Liu, Peter, 1994. "Is the Budget Deficit "Too Large"?: Some Further Evidence," Economic Inquiry, Western Economic Association International, vol. 32(3), pages 511-518, July.
    20. Brixi, Hana Polackova & Ghanem, Hafez & Islam, Roumeen, 1999. "Fiscal adjustment and contingent government liabilities : case studies of the Czech Republic and Macedonia," Policy Research Working Paper Series 2177, The World Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bae:wpaper:011. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Merve Akgul). General contact details of provider: http://edirc.repec.org/data/betamtr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.