Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks were backed by high-quality collateral. Banks intermediate repo liquidity among different counterparties and use CCPs to reallocate high-quality collaterals among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders’ liquidity position or default probabilities.

In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by over 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium – a measure of the risk-bearing capacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.

We use a new, comprehensive data set on the sovereign debt investor base to document three novel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external private to domestic investors - prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; and (iii) the nature of defaults matters: external investors do not leave during preemptive debt restructurings. We further show that repatriation appears to be prevalent when defaults happen in large markets with low capital controls. The data set we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.

For many countries, the systemic risk of local government debt is a matter of concern, but at present, there is little analysis in this area. The complex network based on information analysis provides an effective tool for analyzing the system risk between networks. This paper takes China as an example and takes the provincial urban investment bonds as the object for research. The regional network constructed with the interest rate data of urban investment bonds represents the overall systemic risk of these bonds. The main conclusions are as follows: provincial nodes in western and central areas (underdeveloped areas) are more important in the system, and they are more easier to form debt defaults. For an interconnected urban investment bond network, the higher the default risk of an individual, the greater the risk of the entire system. Finally, based on the indicators obtained from the provincial urban investment bond network model, this paper puts forward policy suggestions for the prevention of urban investment bond risks.

Using daily bond purchase volume data, we evaluate the effects of the South African Reserve Bank’s bond purchase programme on the term structure of the sovereign bond yield curve. Our results indicate that bond purchases significantly flatten the slope and lower the curvature of the sovereign bond curve by 4 bps and 10 bps respectively on impact; however, we find that bond purchases increase the level factor. The latter result is attributed to the increased sovereign risk stemming from the significant fiscal stimulus measures announced around the same period. We also examine how the programme’s announcement influenced South Africa’s corporate bond market using the FTSE/JSE All Bond Other Index and find its price lowered following the announcement, but that the Federal Reserve’s QE announcement had a larger, opposite-signed effect. We interpret this result as evidence that US macroeconomic conditions play an important role in determining South African market responses, and suggests that optimal South African market-easing strategies would benefit from accounting for both domestic and international conditions.

We model the interaction between fiscal and monetary policy and qualify their effects in a semi-structural small open economy model calibrated for Mexico. In our model, fiscal and monetary policy follow rules tied to specific targets. We estimate how fiscal policy, through deficits and public debt accumulation, and monetary policy, through the interest rate, directly affect the economy. We study the nature of the feedback between policy decisions and examine their indirect effects through the sovereign risk channel. We find that the response of monetary policy to stabilise the economy after a shock depends on how strict is the fiscal rule. A loose fiscal stance pushes a tighter monetary policy stance. Instead, the economy recovers faster when monetary and fiscal policy complement each other.

The need to revise the eurozone fiscal rules now seems widely accepted and many amendments are being discussed. They are still meant to impose discipline on governments’ financial behaviour but are trying to define smarter ways to constrain public deficits or spending. The purpose of this policy insight is neither to dispute the need for fiscal discipline nor to formulate a new proposal to enforce it. It is rather to draw attention to an often-overlooked issue that has come to the forefront during the last decade: when monetary policy has lost most of its leverage on private demand, trying to meet a fiscal target that does not take into account the spending behaviour of private agents can unduly constrain economic activity.

We assess the consequences of fiscal consolidation episodes on public sector efficiency (scores) for 35 OECD countries for the 2007-2020 period. We find that fiscal consolidations improve public sector efficiency and results are robust across efficiency models. Moreover, peripheral euro-area economies and economies with debt-to-GDP ratios between 60% and 90% are those whose public sector efficiency scores improve more when fiscal consolidation episodes occur. The evidence that fiscal consolidations enhance spending efficiency is an additional argument for fiscal consolidations, from a policy perspective.

Over the last two decades, the combined effect of multiple crises and low Multi-Annual Financial Framework (MFF) ceilings has led to the emergence of a ‘galaxy’ of EU funds and instruments with variable levels of Member State participation and a diverse range of decision-making and accountability procedures. This study, written on request by the Budget Committee of the European Parliament, analyses the impacts on EU governance and the ability of the European Parliament to fulfil its duties, and considers that reforms are definitely needed to ensure that the EU budget and financial rules reflect the current realities that the EU faces.

This paper assesses the potential economic impact of Next Generation EU (NGEU), focusing on the euro area. Its findings suggest that the envisaged national investment and reform plans present a coherent package to support both recovery from the pandemic-induced crisis and longer-term modernisation of the euro area economy through their digital and green transitions. NGEU, however, can only unfold its full potential if all plans are implemented in a timely and effective way. We estimate the impact of the national plans on output, inflation and public debt using ECB staff economic models under the assumption of successful implementation. Specifically, NGEU is expected to take effect through three channels: structural reform, fiscal stimulus and risk premium. Overall, NGEU may increase gross domestic product (GDP) in the euro area by up to 1.5% by 2026, with the impact expected to be significantly larger in the main beneficiary countries. In Italy and Spain, two of the main beneficiaries, the public debt-to-GDP ratio may be more than 10 percentage points lower by 2031. At the same time, all euro area countries are expected to benefit from NGEU through positive spillovers, greater economic resilience and convergence across countries. Finally, the effect of NGEU on euro area inflation over the medium term is deemed to be contained to the extent that the inflationary effect of additional public expenditure is offset, at least to some degree, by the disinflationary effect of greater productive capacity resulting from the planned structural reform and investment measures.

Thanks to various Fourier DF unit root tests, time-varying fiscal reaction functions and threshold regressions, this study examines the stationarity and the sustainability of public finance for six industrial countries over the period spanning from 1870 to 2017. Longer-run debt sustainability is not rejected for the UK, Sweden, and for the US. The evidence is more mixed for Canada, Italy and Portugal.

This paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP. Using public debt forecast errors, we identify exogenous changes in public debt to assess the impact of a change in the debt to GDP ratio on real GDP. By analyzing data on gross public debt for 178 countries over 1995-2020, we find that the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics. Specifically, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.

The 2015 Addis Ababa Action Agenda recognized the need for policies aimed at maintaining long-term debt sustainability. This paper describes a set of commonly used definitions of debt sustainability and shows that none of them focuses on long-term debt sustainability. It then discusses concept and several practical and conceptual difficulties linked to assessing solvency in developing and emerging countries. Next, the paper asks whether countries default because they borrow too much, or because investors think that they will default and this expectation becomes self-fulfilling. To answer this question, the paper uses a sample of 17 emerging market countries over 1970-2020 to build counterfactual debt levels under the assumption that these countries had continuous access to the international capital market without paying any premium over US Treasuries. The exercise shows that most debt crises are not driven by solvency issues.

This paper analyzes the implications of a gradual increase in the frequency of climatic disasters for public debt sustainability and sovereign default risk. I develop a simple stochastic model of sovereign default that allows for time-varying probability of climatic disasters. I show that the default ratio– the maximum debt-to-GDP ratio that a country can sustain without defaulting – is decreasing and highly nonlinear in the probability of disaster. The model emphasizes the crucial role of the perception of disaster risk, independently from the realizations of disasters. Different perceptions of disaster risk may have very different implications for sovereign default risk. A perception of disaster risk based on a constant disaster probability leads to a constant default ratio. On the other hand, a naive perception of disaster risk– creditors revising the disaster probability in each period while disregarding any future changes– leads to a time dependent default ratio, but it relatively underestimates default risk compared to a fully forward looking perception of disaster risk.

Regarding a prospective reform of the European Stability and Growth Pact (SGP) it seems rather consensual that a simplified framework should take account of the prevailing macroeconomic context and enhance the balancing of sustainability and stabilisation considerations. This paper provides simulation analysis for the euro area and individual countries with a view to assessing the short- and longer-term budgetary and macroeconomic implications of a move to a two-tier system with an expenditure growth rule as single operational indicator linked to a debt anchor. Compared to the status quo, our analysis suggests that expenditure growth targets which take account of the ECB’s symmetric 2% inflation target can improve the cyclical properties of the framework. In particular, providing additional fiscal accommodation in a low inflation environment would enable monetary policy to operate more effectively, especially in the vicinity of the effective lower bound, thereby improving the synchronisation of fiscal and monetary policies. The link to a longer-term debt anchor at the same time ensures a transition towards the Treaty’s debt reference level.

The issue of debt sustainability has been the focus of continued theoretical and practical interest over the years. In emerging markets, much of the debate has focused on explicit government liabilities, which, while relevant, only represents a small share of government´s liabilities. In contrast the balance-sheet approach estimates all government assets (the most important being the net present value of taxes) and liabilities (the most important being the net present value of expenditures) to compute the government´s net worth. In this paper we apply this methodology to study fiscal sustainability in Namibia. We find that, currently, the Namibian government´s net worth is tilted sharply to the left. We simulate the impact of two types of shocks, a depreciation of the real exchange rate and an additional GDP growth and find that both produce a further deterioration of the government's balance sheet. Finally, we ask about what type of policies would allow the government to recover the fiscal sustainability and show that, for example, a partial freeze in public salaries allows to recover fiscal sustainability very quickly.

A situation where interest rates are lower than the economic growth rate, r < g, has begun to emerge in many developed countries, as in Japan. Recent studies and policymakers have begun to consider the possibility that this r < g economic phenomenon may make it unnecessary for governments to maintain fiscal discipline. We re-examine various monetary policies by a central bank including negative interest rate policy in the context of the fiscal sustainability.

We identify a situation where the BOJ's bond purchasing policy can be justified: the policy lowers nominal interest rate and even make it possibly negative and ease the fiscal burden. We also conrm that the conventional concern is applied: the BOJ is forced to help the fiscal authority, resulting in a huge inflation. We proceed by exploring these theoretical possibilities empirically. In particular, we thoroughly examine a recent study by Mian et al. (2022) which argues that Japan can significantly expand its fiscal stimulus without increasing taxes. We find that their results sensitively depend on their choices of various parameters. So, their policy recommendation needs to be taken with a grain of salt.

Nobody can predict with much confidence how the war in Ukraine will evolve and what its geopolitical consequences will be over the next few months, let alone the next few years. Nevertheless, policymakers must think about the implications of the war and the appropriate responses, realizing that they will need to be adapted as circumstances evolve. Moreover, they must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens and avoid taking measures that contradict each other. This is what we try to do in this Policy Brief, focusing on the macroeconomic aspects of relevance for Europe.

This research employs Mexico’s state level data from 2001-2016 to examine the nexus between debt sustainability and regional economic growth. Following the ideas of Reinhart and Rogoff 2010 and Ilzetzki, et al 2019, the research seeks to establish the threshold between debt and regional growth. There is a need to understand whether increasing debt exerts benign effects on regional GDP growth in centralized fiscal systems prevalent in emerging countries and whether these effects differ by type of financing. The study employs the dynamic panel approach by Arellano and Bond (1991) to control for different types of endogeneity and the Seo and Shin (2016) kink model to estimate debt thresholds. The results point to a weak but positive association between debt and GDP growth, which differs by type of debt. Subnational debt thresholds of local governments locate at 67% as a share of guaranteed resources–lower than those reported at the national level. Employing debt as a share of GDP we find a much lower debt threshold (3.25%) which is explained by the fiscal interrelations architecture of federal systems with high local government dependence on federal transfers and subject to soft budget problems. The study finds economic growth is more sensitive to commercial bank debt and capital market debt than other types of debt.

This paper provides an overview of the Russian Federation’s default history, the legal characteristics of the bonds, and potential issues for litigation should a default materialize. The paper’s main argument is that although it is not impenetrable, this Eurobond stock is more protective of the debtor than that of the usual emerging market country. It achieves this through preservation of all the defenses available under current law and the presence of broad language in key provisions. For instance, clauses providing for payment in a different currency if “reasons beyond its control” stop the debt or from paying in the denomination currency have drawn attention. The paper analyzes this and other characteristics, providing initial assessments on how the issues could play out. While the bonds’ characteristics could slow progress toward obtaining judgments when compared to other sovereign debts, they do not prevent them. Collecting on the judgments would be, as usual, the harder part. Ultimately, litigation over these debts could last along time; other creditor versus foreign sovereign episodes involving less debtor-friendly instruments have lasted 15years, and resolution and recovery would be highly contingent on political factors. Finally, the paper provides non-lawyers a general roadmap of debt litigation against foreign sovereigns in the United States and the United Kingdom.