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DEBT INDICATORS

DEBT INDICATORS. DEBT INDICATORS. Content. Introduction Financial Indicators Vulnerability Indicators Sustainability Indicators Final Consideration. 2. 1.-Introduction. DEBT INDICATORS. Government’s ability to address future contingencies. Sustainability.

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DEBT INDICATORS

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  1. DEBT INDICATORS

  2. DEBT INDICATORS Content • Introduction • Financial Indicators • Vulnerability Indicators • Sustainability Indicators • Final Consideration 2

  3. 1.-Introduction DEBT INDICATORS Government’s ability to address future contingencies Sustainability Risk of current conditions’ impact on debt status Liabilities’ performance as market variables Financial Vulnerability Three groups of indicators 3

  4. 1.-Introduction DEBT INDICATORS Aim of Work Analyzing and describing the most accepted vulnerability, sustainability and financial indicators, along with their implementation scope within public debt management and auditing policies. 4

  5. 2- Financial Indicators DEBT INDICATORS Risk Classification • Market risk • Credit risk • Reputation risk 5

  6. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk Most accepted indicators : 1. Interest Rates and Yield Curve These are the gain measure for those who decide to save. Capital markets provide an efficient mechanism to transfer capital between economic agents. 6

  7. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 1. Position and Slope of the Yield Curve 7

  8. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 1. Position and Slope of the Yield Curve 8

  9. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 2. Weighted Average Maturity and Duration • These statistics measure the average time in which issuers must face debt’s service. • The weighted average maturity term possesses a limited use because it only considers payment dates of the principal, while the duration additionally takes into account the interests payment dates. 9

  10. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 3. Modified Duration • It is used to measure the risk of a bonus. It indicates the impact on the bonuses’ prices resulting from interest rates’ variations. 10

  11. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 4. Standard Deviation • It indicates the average detachment between a data set and its average value. 11

  12. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 5. Risk-Adjusted Yield(RaR) • It indicates the way in which an expected interest rate associated to an issue, could cover the expected loss due to an increase in such interest rate. • This indicator shows the number of times that the loss expectations surpass the expected earnings. 12

  13. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 6. Amortization Profile • It is used for distributing on a timeline payments to capital. • The main idea is creating a regular series of amortizations intended to minimize the risk of refinancing large portions of debt if unfavorable market conditions arise. 13

  14. 2- Financial Indicators DEBT INDICATORS Risk Classification Market Risk 7. Risk Cost (CaR) • Together with the term and the amortization profile, CaR is used for risk-management purposes in a debt portfolio. • This indicator allows assessing the cost-related consequences resulting from different issue strategies. 14

  15. 2- Financial Indicators DEBT INDICATORS Risk Classification Credit Risk CONCEPT The potential loss resulting from noncompliance of a party in a financial transaction, or noncompliance with the terms and conditions of a transaction. It is conceived as the weakening of a party’s credit quality, or the weakening of an originally agreed guarantee or collateral. 15

  16. 2- Financial Indicators DEBT INDICATORS Risk Classification Credit Risk 1. Credit default Swap (CDS) CDS provide an insurance against bankruptcy risk from any entity used as reference . The seller of the protection is obliged to purchase the referred bonus at its par value in case of a credit event. The purchaser periodically makes payments to the seller during the term of the contract or until a credit event occurs, whatever happens first. 16

  17. 2- Financial Indicators DEBT INDICATORS Risk Classification Reputation Risk CONCEPT Reputation Risk refers to losses resulting from untaken financing opportunities, due to issuer’s bad reputation resulting from failure in payment or from a damaged fiscal situation. 17

  18. 2- Financial Indicators DEBT INDICATORS Risk Classification Reputation Risk 1. Credit Ratings This indicators represents the private agents’ perceptionof a country’s debt situation. • Rating Agencies 18

  19. 2- Financial Indicators DEBT INDICATORS Risk Classification Reputation Risk 2 A. Country Risk Indicators They measure the degree of risk operating within a country for foreign investments. Investors seek for earnings’ maximization and take risk into consideration, i. e., the possibility of less than expected earnings, or loss occurrence. 19

  20. 2- Financial Indicators DEBT INDICATORS Risk Classification Reputation Risk 2 B. Country-Risk Indicators The country-risk index equals the over-rate that a country pays for its bonuses related to the rate paid by the Treasury of the United States. 20

  21. 2- Financial Indicators DEBT INDICATORS Risk Classification Reputation Risk 2 C. Country-Risk Indicators The more damaged the country-risk rating is, the larger it will be the cost of debt, and the lesser economic policies can be handled; hence, the risk of noncompliance will be bigger. 21

  22. 3.- Vulnerability Indicators DEBT INDICATORS The 90´s Monetary crisis Emerging market economies effects Main issue of economic policy: Analysis and research on fiscal vulnerabilities and their link to debt. 22

  23. 3.- Vulnerability Indicators DEBT INDICATORS Emerging market economies • They are vulnerable to variation of investors’ attitude • Special attention was placed on this group of countries and their vulnerability assessment work 23

  24. 3.- Vulnerability Indicators DEBT INDICATORS Vulnerability analysis • Data’s quality and transparency • Availability of timely and detailed data on international stocks, external debt and capital flows • Definition of critical values • Conduction of strain tests • Applying early-warning system models 24

  25. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis • Vulnerability indicators encompass: • Public sector • Financial sector • Households • Enterprises • When economies are under strain, one sector’s problems spread to others. 25

  26. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis These are useful indicators to define debt’s evolution and payment capability. They offer certain signals about the worsening or improvement of the government’s position. 26

  27. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Most accepted indicators by international institutions and governments and the academic sector: 1. Debt’s balance / domestic budgetary revenue 27

  28. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Most accepted indicators by international institutions and governments and the academic sector: 2. Debt’s service / domestic budgetary revenue 28

  29. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Most acceptedindicators by international institutions and governments and the academic sector: 3. Current value / domestic budgetary revenue 29

  30. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Most acceptedindicators by international institutions and governments and the academic sector: 4. Interests / GDP 30

  31. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis • Most acceptedindicators by international institutions and governments and the academic sector: 5. Interests / domestic budgetary revenue 31

  32. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Frequently used indicators in a cross-cutting way with the aforementioned : 6. Foreign debt / exports 32

  33. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability indicators Frequently used indicators in a cross-cutting way with the aforementioned: 7. Net International reserves / foreign debt 33

  34. 3.- Vulnerability indicators DEBT INDICATORS Vulnerability analysis Frequently used indicators in a cross-cutting way with the aforementioned : 8. • Amortization / external debt disbursements 34

  35. 3.- Vulnerability indicators DEBT INDICATORS Minimal suggested levels for emerging countries, provided by two different international organizations. * Debt Relief International: “Key Aspects of Debt Sustainability Analysis”, 2007 ** International Monetary Fund, Foreign Affairs Department: Technical Note “Vulnerability Indicators”, April 30, 2003 and several research documents. 35

  36. 4.- Sustainability indicators DEBT INDICATORS Fiscal sustainability indicators Public debt and the corresponding interest payment became a structural problem in countries showing persistent deficits. 36

  37. 4.- Sustainability indicators DEBT INDICATORS Fiscal sustainability indicators Fiscal sustainability indicators seek to describe public finances’ inter-temporal aspects, based on year-to-year available information. 37

  38. 4.- Sustainability indicators DEBT INDICATORS Fiscal sustainability indicators Systematic fiscal imbalances will mean future pressures concerning interest expenditure, which will in turn contribute to new debt accumulation. 38

  39. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 1 A. Fiscal Consistency Indicator • It takes into consideration the consistency of the current tax policy, while keeping the debt-to-GDP ratio constant. 39

  40. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 1 B. Fiscal Consistency Indicator • where • tn* is the fiscal burden stabilizing, in a period of (n) years, the debt-to-GDP ratio in level d*, • g being the expenditure • r being the interest rate, and • q being the GDP’s growth rate. 40

  41. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 2 A. Buiter’s Indicator • It calculates the gap between the sustainable primary balance and the primary effective balance. • The sustainability condition is defined starting from a wider net wealth concept than the one implicit in the ratio debt / GDP. 41

  42. 4.- Sustainability indicators DEBT INDICATORS • 2 B. Buiter’s Indicator • where • b* is the ratio debt / sustainable GDP, • b is the ratio debt / GDP, • wt is the net / real government wealth value as a GDP proportion, • r is the interest rate, and • q is the GDP increase rate. Main indicators 42

  43. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 2 C. Buiter’s Indicator • A tax policy is defined as sustainable by this indicator if the net government wealth is kept steady, in a ex-ante sense. 43

  44. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 3 A. Short-term primary gap indicator • It provides the primary balance level needed to stabilize debt as a proportion of the GDP. 44

  45. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 3 B. Short-term primary gap indicator • where • BP* is the primary balance needed to stabilize debt, • BP is the prevailing primary balance • r the real interest rate trend • n is the population growth’s rate, and • b is the ratio debt / GDP. 45

  46. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 3 C. Short-term primary gap indicator • If the permanent primary balance exceeds the current primary balance, the primary path is positive. This means that the fiscal policy is not sustainable. • On the contrary, when the permanent primary balance is lower than the current primary balance, the fiscal policy tends to reduce the debt level regarding the GDP. 46

  47. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 4 A. Macro-adjusted primary deficit • This indicator was created due to the high volatility of macroeconomic variables, which leads deficit in a specific moment to be different from the one that would appear within normal macroeconomic conditions. 47

  48. 4.- Sustainability indicators DEBT INDICATORS Main indicators • 4 B. Macro-adjusted primary shortage • where • r is the real interest rate, • g represents the analyzed year’s real growth • is the primary macro-adjusted balance 48

  49. 4.- Sustainability Indicators DEBT INDICATORS Main indicators • 4 C. Macro-adjusted primary shortage • The inconvenience of this indicator lies within the need of establishing what a “normal economy condition” is. 49

  50. 4.- Sustainability Indicators DEBT INDICATORS Main indicators • 5 A. Sustainable fiscal position indicator • It considers a historical methodology which explicitly assess the tax authority reaction in face of changes in those variables defining debt’s sustainability in time. 50

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