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Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability

Author

Listed:
  • Carmine Gabriele

    (ESM)

  • Aitor Erce

    (ESM)

  • Marialena Athanasopoulou

    (ESM)

  • Juan Rojas

    (ESM)

Abstract

It is well known that no single metric can provide reliable cross-country risk assessments of debt sustainability. While approaches to understanding sustainability have traditionally relied heavily on stock metrics, a consensus is emerging that debt sustainability should be linked to both stock and flow features of underlying public debt. This paper informs this debate by analysing the ability of gross financing needs, the preferred flow metric in current debt sustainability analyses by official institutions, to provide additional information to that provided by standard stock metrics of a sovereign’s likelihood of distress. Our main contribution is to document a significant negative effect from changes in gross financing needs when debt stocks are high. These results support the intuition that countries can sustain very large debt stocks if these do not generate unmanageable flow needs. Additionally, we show that sovereign roll-over needs are a critical element driving this effect. Given the role of official lending in taming the dynamics of this component, our findings also inform the literature on the role of official lending in crises resolution.

Suggested Citation

  • Carmine Gabriele & Aitor Erce & Marialena Athanasopoulou & Juan Rojas, 2017. "Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability," Working Papers 24, European Stability Mechanism.
  • Handle: RePEc:stm:wpaper:24
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    File URL: https://www.esm.europa.eu/sites/default/files/wp24_final_2.pdf
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    References listed on IDEAS

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    1. Bernoth, Kerstin & Erdogan, Burcu, 2012. "Sovereign bond yield spreads: A time-varying coefficient approach," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 639-656.
    2. Andreas Müller & Kjetil Storesletten & Fabrizio Zilibotti, 2016. "The Political Color Of Fiscal Responsibility," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 252-302, February.
    3. Dias, Daniel A. & Richmond, Christine & Wright, Mark L.J., 2014. "The stock of external sovereign debt: Can we take the data at ‘face value’?," Journal of International Economics, Elsevier, vol. 94(1), pages 1-17.
    4. Antonio Bassanetti & Carlo Cottarelli & Andrea F Presbitero, 2019. "Lost and found: market access and public debt dynamics," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 445-471.
    5. Julian Schumacher & Beatrice Weder di Mauro, 2015. "Greek Debt Sustainability and Official Crisis Lending," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 279-305.
    6. Lee, Chien-Chiang & Chiu, Yi-Bin & Chang, Chi-Hung, 2013. "Insurance demand and country risks: A nonlinear panel data analysis," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 68-85.
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    Citations

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    Cited by:

    1. Corsetti, G. & Erce, A. & Uy, T., 2017. "Official Sector Lending Strategies During the Euro Area Crisis," Cambridge Working Papers in Economics 1730, Faculty of Economics, University of Cambridge.
    2. Panayiotis Alexakis & Gikas Hardouvelis & Dean Paxson & Gordon Sick & Lenos Trigeorgis, 2018. "Greek Sovereign Debt: Addressing Economic Distress and Growth in the Euro Area," Multinational Finance Journal, Multinational Finance Journal, vol. 22(1-2), pages 1-33, March - J.
    3. Flavia Corneli, 2018. "Sovereign debt maturity structure and its costs," Temi di discussione (Economic working papers) 1196, Bank of Italy, Economic Research and International Relations Area.
    4. Corsetti, Giancarlo & Erce, Aitor & Uy, Timothy, 2018. "Debt Sustainability and the Terms of Official Support," CEPR Discussion Papers 13292, C.E.P.R. Discussion Papers.
    5. Marios Psychalis & Panagiotis Gournas & Nagia Grigorakou & Petros Dimitrakopoulos & George Stivachtis, 2020. "Fiscal Policy, Growth and Competitiveness in EMU: Evidence from Portugal and Greece," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 18-24.
    6. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    7. Aitor Erce & Xu Jiang & Diana Zigraiova, 2020. "Quantifying Risks to Sovereign Market Access: Methods and Challenges," Globalization Institute Working Papers 377, Federal Reserve Bank of Dallas, revised 10 Feb 2020.

    More about this item

    Keywords

    Sovereign sustainability; debt stocks; financing needs; maturity;

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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