Public Debt

Public debt refers to the amounts owed by the different levels of government and used to finance public deficits resulting from a higher level of program spending to budgeted income. Debt can be acquired within the same country or abroad and usually takes the form of bonds, paper and government securities (although in some cases the debt is acquired directly through a supranational body like the IMF).

Below are studies that examine some of the most relevant aspects related to public debt in Latin America.

The sustainability of public debt, the snowball effect and the "original sin" -- June 2004

Martner R. y V. Tromben

Although, in general, the coefficients of public debt to GDP (gross domestic product) remain comparatively low in Latin America in relation to other emerging countries, liquidity problems have not been able to avoid. Some authors explain this contrast by the low level and high volatility of government revenues, by weak domestic financial systems and by the poor quality of fiscal institutions.

This article emphasizes the importance of other exogenous factors. Thus, the combination of low economic growth and devaluation in the context of dollarized liabilities generated a huge snowball. Much of it is explained by the so-called "original sin", namely the impossibility for an emerging country to borrow externally in their own currency.

Although most of the effort to control the dynamics of public debt will remain domestic, its medium-term sustainability initiatives depend on international financial institutions aimed at improving the conditions of public indebtedness in emerging countries.

Who Saw Sovereign Debt Crises Coming? -- November 2008

Nieto S.

This paper studies sovereign debt crises from the primary market of government bonds and describes the behavior and interactions between the main players in this market around emerging sovereign crises. This study shows that investment banks detect the high risk of default before they occur and investors perceive them.

Wall Street and Elections in Latin American Emerging Economies -- October 2008

Nieto S. y J. Santiso

This study analyzes the links between financial markets and emerging democracies, highlighting the changes in the perceptions of analysts and investors against political cycles in emerging countries. In particular, this research reveals that investment banks recommend the sale of debt securities before presidential elections.

Administration of public debt and political cycles: challenges for Latin America. -- October 2008

Nieto S.

During the last decade, many Latin American governments have made significant mistakes in administering the composition of public debt in the process of reducing the exposure of its currency abroad. Facing a debt in local currency is not new to Latin America; what is new, however, is the extension of local currency debt abroad. Indeed, while five years ago all the sovereignty of Latin American external debt was denominated in foreign currency, today half of the debt of countries like Brazil, Colombia, Peru and Uruguay is issued in local currencies..

Estimating a Fiscal Reaction Function. The Case of Debt Sustainability in Brazil -- April 2005

De Mello L.

This paper reviews recent trends in fiscal performance in Brazil, estimates fiscal reaction functions for the consolidated public sector and different levels of government, and tests for the sustainability of the public debt dynamics. The empirical analysis, based on monthly data for the period 1995-2004, suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets. In addition, the central government appears to follow a spend-and-tax policy: changes in revenue are affected strongly by expenditure, with about two-thirds of changes in primary spending being offset through higher revenue over the long term. Institutions are also found to matter for fiscal sustainability. The responsiveness of sub-national fiscal stance to indebtedness, as well as that of central government revenue to changes in primary spending, appears to have strengthened after 1998, when ceilings on indebtedness were introduced.