Global Approaches

2. Global Approaches System of National Accounts (SNA68) System of National Accounts (SNA53) Public Sector Debt Statistics (PSDS11) System of National Accounts (SNA93) Government Finance Statistics (GFS86) European System of Accounts (ESA95) Government Finance Statistics (GFS01) Excessive Deficit Procedure (EDP 92) System of National Accounts (SNA08) European System of Accounts (ESA10)

3. Public Debt definition All approaches agreed on the following definition Grossconsolidated financial liabilities of all institutions of General Government.

4. Public Debt - outline 1 They differed in tackling the following: 2 3 Scope of government liabilities 4 Public Debt Structure Public Debt Arrears Valuation method

5. Institutional Functional Scope of government liabilities There are two basis for defining “General Government”: • All government units that are controlled and mainly financed by central government, state government, local government and social security funds • Adopted by: EDP92, SNA93, ESA95, GFS01, SNA08 & PSDS11 • EDP & ESA add another criteria:whether more than 50 percent of the production costs are covered by sales. • All units carrying out a function of government . • Adopted by GFS 86

6. Public Debt - outline 1 They differed in tackling the following: 2 3 Scope of government liabilities 4 Public Debt Structure Public Debt Arrears Valuation method

7. Public Debt Structure Basic Components SNA93, ESA95, SNA08 Financial derivatives Loans GFS86, EDP92, GFS01, SNA08 & PSDS11 (unfunded pension liabilities) Securities other than shares GFS86, SNA93, ESA95, GFS01, SNA08 & PSDS11 Currency and Deposits Accounts payable

8. Public Debt - outline 1 They differed in tackling the following: 2 3 Scope of government liabilities 4 Public Debt Structure Public Debt Arrears Valuation method

9. Debt Arrears There are two ways for recording arrears: EDP92, SNA93, ESA95, SNA08 & PSDS11 Accounts payable Sub classification GFS01 when arrears exist, either each relevant category of liabilities should be sub-classified to indicate the amounts in arrears, The amounts in arrears should all be classified as accounts payable. GFS86 doesn’t record debt arrears

10. Public Debt - outline 1 They differed in tackling the following: 2 3 Scope of government liabilities 4 Public Debt Structure Public Debt Arrears Valuation method

11. Valuation method • Almost all approaches calculate some of the debt items using the market valuation and the other items using the nominal valuation . • EDP92 uses nominal valuation in calculating all debt items. • Differences among approaches could be cited as follows: • As for GFS86, debt securities are valued at the amount the government is obligated to pay when the debt matures, which may differ from the nominal value and the current market value.

12. Valuation method What’s the difference between Market value and Nominal value? As the redemption date approaches the market value should converge towards the nominal value. Market value Nominal value It is the value reflecting the impact of inflation rates and exchange rate changes among debt partners It is the value that government will have to pay on maturity

13. Debt sustainability Debt sustainability analysis: As Present value of public debt equals zero, Annual Primary surpluses are accumulated to pay the debt.

14. Debt sustainability criteria • Relationship between real growth and real interest rate Polito and Wickens, (2005) expressed public debt sustainability in terms of the following formula: Where sustainability depends on the changes in the trend of Which in turns is linked to the value of

15. Debt sustainability criteria When is less than zero Is stable, where real GDP growth rate exceeds real interest rate and the debt is said to be sustainable When is greater than zero Is unstable, where real GDP growth rate is lower than real interest rate and the debt is said to be unsustainable

16. Debt sustainability criteria • Public Debt/GDP ratio Anyone country is said to be fiscally unsustainable if: Debt/GDP ratio in anyone country exceeds other countries with relevant fiscal conditions Debt/GDP ratio settles at high rates compared to historical trends. Maintaining a stable Debt/GDP ratio requires structural changes in the fiscal policy.

17. Debt sustainability criteria • Fiscal rules General definition: “Set of legal rules and regulations levied on Budget deficit, taxes, public expenditures and public debt”. International experience reveals that governments adopt several fiscal rules including: Golden rule Balanced Budget Rule Flexible Budget Rules Stability and Growth Pact Investment Sustainability

18. Debt sustainability criteria Golden rule “over the economic cycle, the Government will borrow only to invest and not to fund current spending” Balanced Budget Rule “Constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government”.

19. Debt sustainability criteria Flexible Budget Rules “The government is allowed to hit a temporary justified budget deficit given the disclosure of the time span needed for attaining budget balance Stability and Growth Pact Sets two criteria: a deficit to GDP ratio not exceeding 3% a debt to GDP ratio not exceeding 60%.