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

29 Pages Posted: 21 Jun 2017

See all articles by Carmine Gabriele

Carmine Gabriele

European Stability Mechanism

Aitor Erce

European Stability Mechanism; Banco de España - Associate Directorate General International Affairs

Marialena Athanasopoulou

European Stability Mechanism

Juan Rojas

European Stability Mechanism

Date Written: June 2017

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.

Keywords: Sovereign sustainability, debt stocks, financing needs, maturity

JEL Classification: H62, H63, F34

Suggested Citation

Gabriele, Carmine and Erce, Aitor and Athanasopoulou, Marialena and Rojas, Juan, Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability (June 2017). European Stability Mechanism Working Paper No. 24. Available at SSRN: https://ssrn.com/abstract=2990061 or http://dx.doi.org/10.2139/ssrn.2990061

Carmine Gabriele (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Aitor Erce

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
Luxembourg, 1347
Luxembourg

Banco de España - Associate Directorate General International Affairs

Alcala 50
Madrid 28014
Spain

Marialena Athanasopoulou

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Juan Rojas

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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