3ECBOccasional Paper No 132October 2011 - PDF document

1 3ECBOccasional Paper No 132October 2011
3ECBOccasional Paper No 132October 2011 NON-TECHNICAL SUMMARY 51 INTRODUCTION 72 A CONCEPTUAL FRAMEWORK FOR THE MEASUREMENT OF GOVERNMENT DEBT 93 THE SIZE OF GOVERNMENT DEBT 133.1 Government liabilities 3.2 Government debt in the 3.3 Government assets 3.4 Government assets and net debt 4 OFF-BALANCE-SHEET ASSETS AND LIABILITIES 254.1 Contingent liabilities 4.2 Implicit assets and liabilities 5 THE

2 COMPOSITION OF GOVERNMENT DEBT 336 CONC
COMPOSITION OF GOVERNMENT DEBT 336 CONCLUSIONS 40REFERENCES 41ANNEXES 441 Government EDP debt in euro 2 Financial assistance provided to 4ECBOccasional Paper No 132October 2011 nancial assets from the liability dence; (ii) scal surveillance needs to put nancial assets cit Procedure in particular; (vi) beyond the nance vulnerabilities. 5ECBOccasional Paper No 132October 2011 NON-TECHNICAL na

3 nces, which takes existing government c
nces, which takes existing government ces are uence the future scal frameworks. dence; (ii) scal surveillance nancial assets can be relevant when analysing nance vulnerabilities. nancial instruments, currency and maturity. rst part of this paper, rst sub-section focuses on gross ve biggest euro area countries, nancial assets and nancial assets were approximately 35% of GDP nancial assets d

4 iffers remarkably between nancial asset
iffers remarkably between nancial assets allows us to nancial crisis led governments to nancial sector in 2008-10,and residual and average maturity. Data for 2010 6ECBOccasional Paper No 132October 2011 nding is that virtually the entire ve years, and ve years. The average residual maturity of ve years in Finland and scal vulnerabilities in the euro nancing and foreign holders. 7 ECBOccasio

5 nal Paper No 132October 2011 nancial, e
nal Paper No 132October 2011 nancial, economic and sovereign scal burden for governments in the euro scal policies. The increased nancing costs, with a possible adverse nancing conditions and scal stabilisers, expansionary scal policies and government nancial sector. cit as a cit-to-GDP ratios for 2010 cits in Ireland and Greece to de cits lower cit levels, the scale of the recent growth r

6 ates cult to manage nances in the euro
ates cult to manage nances in the euro area countries. scal de Government debt refers to the EDP debt concept, unless 1 otherwise indicated (see Section 3.1 for debt deÞ nitions). Forecasts are taken from the European Commission’s European Economic Forecast – Spring 2011. 2 of the euro area with the G7 countries, see, for example, Rother 3 8 dence in the scal sustainability of governm

7 ent debt within scal risks; Section 4
ent debt within scal risks; Section 4 nally, Section 6 outlines a set of 9ECBOccasional Paper No 132October 2011 A CONCEPTUAL FRAMEWORK FOR THE MEASUREMENT OF GOVERNMENT 2 A CONCEPTUAL FRAMEWORK FOR THE MEASUREMENT OF GOVERNMENT DEBT In theory, a government accumulates debt as the scal de cits when government expenditure exceeded government revenue. In practice, the relationship between debt and

8 cits is more complicated and other fac
cits is more complicated and other factors come into play, for example additional borrowing nancial , the change in the value of debt denominated in , and remaining statistical cit-debt Government debt can be expressed in terms of level, per capita, or as a provides information about the size of government debt in relation to the size of an economy, which is a key factor in determining the tax-e

9 arning capacity and thus the ultimate sc
arning capacity and thus the ultimate scope for debt servicing. The relationship between debt and cit ( cit-debt adjustment High and growing government debt may impact on nominal (and real) interest rate levels. In addition, mounting government debt increases interest expenditure and crowds out other expenditure possibly more favourable to economic growth such as government investment. A ‘snow

10 ball’ effect, where higher debt inc
ball’ effect, where higher debt increases government interest expenditure, nanced by additional issuance of debt, causes a vicious circle that may be detrimental to the sustainability of the public nances and overall economic conditions. Empirical evidence suggests that high government debt levels hamper economic growth and discourage capital accumulation (see, for example, Checherita and Roth

11 er, 2010). The normal channels in this r
er, 2010). The normal channels in this regard are ation, higher real long-term interest rates, lower private investments, expected rises in distortionary taxation and lower growth-enhancing primary spending. In some cases, an unsustainable growth in ow of capital from a country and contribute to a banking or exchange rate crisis (see, for example, Reinhart and Rogoff, 2009). cits. In the European

12 context, nancial or non- nancial inves
context, nancial or non- nancial investment via transactions in deposits nance its activities) and thereby also government cit unchanged. nancial transactions are cit-debt adjustments include the time of recording nancial derivatives, statistical 10ECBOccasional Paper No 132October 2011 nancial markets may respond rst, but eventually yield spreads nancial crisis, provide evidence that scal

13 balance cits and/or higher government
balance cits and/or higher government debt nancial sector to the nances and the le of nancing risks nancing risks and also to consider debt nancial assets in order to assess scal policy manoeuvre necessary nances and the scal risks. Debt nances by solvency and the intertemporal budget constraint – ciently large primary surpluses t=1 (2) The issue of sustainability is well covered b

14 y extensive literature 9 (see, for examp
y extensive literature 9 (see, for example, Giammarioli et al. (2007), the European Commission (2009) and the ECB (2011)). 17ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT Government EDP debt in the euro area countries (1999, 2007, 2010, 2011, 2012) 1999 2007 2010 2011 Belgium 113.7 84.2 96.8 97.0 97.5 -29.5 13.360.9 64.9 83.2 82.4 81.1 4.0 16.1Estonia 6.5 3.7 6.6 6.1 6.9 -2.8 3.2Ir

15 eland 48.2 25.0 96.2 117.9 -23.2 92.9Gre
eland 48.2 25.0 96.2 117.9 -23.2 92.9Greece 100.3 105.4 142.8 157.7 166.1 5.1 60.762.3 36.1 60.1 68.1 71.0 -26.2 34.9France 58.8 63.9 81.7 84.7 86.8 5.1 22.9113.7 103.6 119.0 120.3 119.8 -10.1 16.2Cyprus 58.9 58.3 60.8 62.3 64.3 -0.6 6.0Luxembourg 6.4 6.7 18.4 17.2 19.0 0.2 12.457.1 62.0 68.0 68.0 67.9 4.8 5.9Netherlands 61.1 45.3 62.7 63.9 64.0 -15.8 18.7Austria 67.3 60.7 72.3 73.8 75.4 -6.6 14.7Por

16 tugal 49.6 68.3 93.0 101.7 107.4 18.7 39
tugal 49.6 68.3 93.0 101.7 107.4 18.7 39.1Slovenia 24.3 23.1 38.0 42.8 46.0 -1.2 22.9Slovakia 47.8 29.6 41.0 44.8 46.8 -18.3 17.2Finland 45.7 35.2 48.4 50.6 52.2 -10.5 17.0 71.7 66.2 85.2 87.7 88.5 -5.5 22.3 nancial crisis is not consolidated. nancial crisis is consolidated. LoansShort-term securitiesLong-term securities 18ECBOccasional Paper No 132October 2011 3.3 GOVERNMENT ASSETS AND NET GOVERNMEN

17 T DEBT nancial assets represents more t
T DEBT nancial assets represents more than one-third nancial assets include currency and deposits, cant debt reductions were ve biggest euro area countries. cant consolidation cant reduction in their government debt-to-GDP ratio (by roughly 30 p.p. and General government gross debt for the period 1900-2012 in Germany, Spain, 190019201940196019802000 GermanySpainFranceItalyNetherlands Source:

18 ECB calculations based on the following
ECB calculations based on the following data sources: Germany – debt statistics (West Germany for 1950-90, 19ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT nancial assets nancial assets of 5.5% of GDP in 2010 nancial assets nancial crisis. ect the reinforcement ect the net purchases by ects equity injections nancial institutions in many countries nancial sector, nancial

19 assets and liabilities nancial sector.
assets and liabilities nancial sector. nancial assets held by government is ects the ed within ects capital injections, in the form ects the recapitalisation of nancial assets by the Irish National ned as the balancing item nancial and non- nancial) assets and nancial assets. Composition of euro area 199920012003200520072009 Source: ECB calculations (based on Eurostat and national data).

20 20ECBOccasional Paper No 132October 201
20ECBOccasional Paper No 132October 2011 nancial assets. nancial assets culty in ascertaining a priori the extent to nancial assets, which nancial asset without incurring (major) losses. rst priority when selling nancing needs as they mature or to nancial institutions. The market value of cult to determine. In this respect, Eurostat c “decision tree” for valuing securities. Chan

21 ge in government financial asset-to-GDP
ge in government financial asset-to-GDP ratio in the euro area (2007-10) 1Government 2Change in nancial assets-to-GDP ratio (2=3+4)3Nominal GDP growth -3.5-1.62.3-2.04Financial assets adjustment 4.42.01.24a Of which support to nancial sector 0.01.90.44bOf which other nancial assets. Government nancial assets at market value and consolidated between sub-sectors of Euro area government net debt 1

22 00806001008060 net debtfinancial assets
00806001008060 net debtfinancial assets 199920012003200520072009 21ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT 3.4 GOVERNMENT ASSETS AND NET DEBT IN THE EURO AREA COUNTRIES nancial assets have been nancial assets for the period 2007-10. This nancial assets of 14% of GDP, nancial assets of around 7% of GDP for gures showed that the nancial assets will be liquidated as agreed i

23 n nancial assets of over nancial asset
n nancial assets of over nancial assets by country, Table 8 shows that a cant amounts of nancial assets in the cant in the asset portfolios 2007200820092010 22ECBOccasional Paper No 132October 2011 LoansShares and Note: Other assets mainly cover monetary gold (F.11), special drawing rights (F.12), transactions related to the net acquisition of insurance ows and out ows related to purchases and

24 sales of and nancial derivatives. nan
sales of and nancial derivatives. nancial statistics between the euro area and the US and ed within the cit and debt indicators are compiled according to cit data are based on the National Income and Products Accounts gures on government debt are compiled following the “EDP debt” nition covering government liabilities such as currency and deposits, securities other than nancial der

25 ivatives) and loans. Comparable data 23E
ivatives) and loans. Comparable data 23ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT nancial assets nancial assets nancial assets for the period nancial assets and net debt for the euro area, US and Japan in 2007-10. The nancial assets worth just over 75% of GDP in 2009 (with nancial derivatives), shares and other equities and nancial assets represented about 29% of GDP in 20

26 10, with 65% of the Comparable governme
10, with 65% of the Comparable government debt-to-GDP ratio for the euro area, US and Japan 199920012003200520072009 ce data and Bank of Japan), 2010 data for Japan were not Financial assets and net debt for 12341234123euro areaUnited StatesJapan ce data and Bank of Japan); 2010 data for Japan were not 24ECBOccasional Paper No 132October 2011 nancial assets in 2008, mostly nancial sector, wh

27 ich helped nancial assets and liabiliti
ich helped nancial assets and liabilities. While Financial assets and the ESA debt GermanySpainFranceItalyNetherlands 123412341234123412341 20072 20083 20094 2010 GreeceBelgiumPortugalMaltaAustriaCyprus 123412341234123412341234 -100-50050100150IrelandSlovakiaSloveniaEstoniaLuxembourgFinland-100-500 123412341234123412341234Source: ECB calculations (based on Eurostat and national data). Annex 2

28 provides a detailed table containing dat
provides a detailed table containing data for Þ nancial assets per country over the period 2007-10. 25 ECBOccasional Paper No132October 2011 OFF-BALANCE-SHEET ASSETS AND 4 OFF-BALANCE-SHEET ASSETS cation of 4.1 CONTINGENT LIABILITIES nancial sector can take schemes. Guarantees on retail bank deposits are (e.g. capital injections for banks for which the nancial sector gures, namely a ceiling and

29 a nancial institutions. In practice, s
a nancial institutions. In practice, scal risks stemming from the 6.5% of The CIFS scheme followed on from the announcement by the 23 Irish government on 30 September 2008 that it would guarantee the covered liabilities of Bank of Ireland, AIB, Anglo Irish Bank, nancial institutions to which the cit and also on (explicit) government debt cit through revenue and expenditure) or via nancial ins

30 trument selected). cit to the capital e
trument selected). cit to the capital expenditure nancial crisis became explicit in nancial crisis, governments across Europe also embarked on support measures other than public guarantees. In order to restore dence in the banking sector, governments provided support in the form of recapitalisations (through purchases of new equity) and by providing liquidity (purchase of impaired assets, issuing

31 of loans, asset exchanges/swaps). cit
of loans, asset exchanges/swaps). cit and debt statistics are compiled consistently and homogenously across the EU Member States, on how to record the operations carried out in nancial crisis, on the basis of ESA 95. In the Irish case, the support measures were related to the capital injections for Allied nancial institutions and nancial markets nancial crisis, accessible via the following li

32 nk: Cumulative financial sector stabili
nk: Cumulative financial sector stabilisation operations and their impact on government Measures impacting on government debt (2008-10)Measures impacting on Capital injectionsAsset of sharesLoans5.70.00.00.115.828.01.90.011.10.50.00.00.00.07.00.00.016.20.0125.2125.21.60.00.00.725.127.40.00.02.40.00.20.00.00.04.723.60.30.00.00.00.00.00.00.017.217.2Luxembourg6.10.00.00.00.00.00.00.05.80.82.40.02.10.00

33 .00.47.817.61.20.02.20.33.111.70.00.00.4
.00.47.817.61.20.02.20.33.111.70.00.00.43.56.133.30.00.00.00.00.00.00.00.01.50.13.50.56.513.1 27 ECBOccasional Paper No132October 2011 OFF-BALANCE-SHEET ASSETS AND Irish Bank, Bank of Ireland and Anglo Irish Bank as well as the transfer of loans to the National Assets Management Agency (NAMA). These operations substantially impacted on explicit government debt, with a cumulative increase of and als

34 o cit. In Germany, the crystallisation
o cit. In Germany, the crystallisation of support to the banking sector has also resulted in a considerable increase in (explicit) government debt (13.5% of GDP). This stems from capital injections to Commerzbank and various Landesbanken (2008-09) and a transfer of non-strategic assets and liabilities from WestLB AG to Erste Abwicklungsanstalt (EAA) as well as interventions related to HRE bad durin

35 g 2010. In the Netherlands, the measures
g 2010. In the Netherlands, the measures to support Fortis, ABN AMRO and ING resulted in a remarkable cumulative increase in (explicit) government debt of around 9.0% of GDP for the period 2008-10. In Belgium, the cumulative increase in (explicit) government debt of around 5.8% of GDP, also for the period 2008-10, was due to capital injections in Fortis, Dexia and KBC. nancial sector, the net direct

36 impact nancial-sector operations on go
impact nancial-sector operations on government nancial-sector operations (18.7% of GDP) nancial support arrangements ciary country. of GDP) over the period 2010-13 (see Annex II). EU Council as a limited liability company under nancing needs of the euro area countries in culty. This implies that euro area countries (see Annex II) and it will also be used in future The granting of guarantees as

37 such nancial entities managing ciar
such nancial entities managing ciary euro area countries, as will scal risks scal risk statements, which would ideally ciary euro area cit/surplus of the supporting nancial assets.According to Eurostat’s preliminary view on how to record the future European Stability Mechanism (7 April 2011), the ESM loans should be treated as a direct loan from an international organisation, scal ri

38 sk in this context would result from the
sk in this context would result from the difference scal outcomes in terms of Cumulative financial support arrangements in the euro area and their impact Subcribed capitalPaid-in capital ed in the European Council conclusions of 23/24 June 2011. 29 ECBOccasional Paper No132October 2011 OFF-BALANCE-SHEET ASSETS AND 4.2 IMPLICIT ASSETS AND LIABILITIES rstly to illustrate gures for the euro IMPLICI

39 T LIABILITIES area, this would represent
T LIABILITIES area, this would represent around 330% of GDP t schemes represent around nances (where future contributions should also ed as implicit is the fact that they are not recorded in ned schemes depend on the future development of Accrued-to-date pension entitlements, as compiled by the OECD, the IMF, DESTATIS, INSEE SourceOECDMethodImplicit pension Social securityDeEnd-year1990 cits,

40 and therefore government debt- scal sust
and therefore government debt- scal sustainability. nancial and economic scal positions. nances. In any case, given the nd an ned implicit government assets es that the country-speci c MTOs Increases of ageing-related government expenditure-to-GDP ratio over GDP2007-60GDP2007-606.9Luxembourg4.8Malta0.4Netherlands8.9Austria15.9Portugal9.0Slovenia2.7Slovakia1.6Finland 31 ECBOccasional Paper No13

41 2October 2011 OFF-BALANCE-SHEET ASSETS
2October 2011 OFF-BALANCE-SHEET ASSETS AND scal sustainability, in particular when cient tax nance such table companies or claims from future court nance these liabilities in the future in the form Total government revenues FIATFRBEITNLDESILUMTCYPTGRESIESK total government revenuestax burden (included social security contributions) Sources: European Commission (based on Eurostat and national

42 data).Þ ned as the sum of indirect, di
data).Þ ned as the sum of indirect, direct and capital taxes and social security contributions (actual and imputed). ciency of the medical nancial stability of PAYG ow or increases in the labour ts could be another example of an 33ECBOccasional Paper No 132October 2011 THE COMPOSITION OF GOVERNMENT 5 THE COMPOSITION OF GOVERNMENT DEBT uences both a government’s costs and ce, tries to mi

43 nimise the costs in view of re-opening g
nimise the costs in view of re-opening government benchmark bonds, issuing or on avoiding any accumulation of issuance nancing conditions of the private sector, with scal measures to counteract the effect ation-indexed bonds may reduce the ation with a Chart 6 shows the composition of government debt in the euro area broken down by type of nancing instrument, the level of government and Long-t

44 em securities, i.e. securities with init
em securities, i.e. securities with initial maturity of over one year, represented 70% of government debt in the euro area in 2010, while short-term securities accounted for 9%, and loans from nancial institutions, which are typically used at the municipal level, corresponded to 18% of EDP debt. Around 83% of EDP debt comprised debt issued by central government, while the remaining 17% was issued by

45 local (municipal) government, state gov
local (municipal) government, state governments or social nancial institutions, under 2% The residual maturity is the time from the reference date until the 38 contractual redemption date of an instrument.Euro area government debt held by residents refers to holders 39 resident in the country whose government has issued the debt. 34ECBOccasional Paper No 132October 2011 nancial corporations. Reg

46 arding the nancing risk, the government
arding the nancing risk, the government could face a Chart 6 (percentage of total)By type of instrumentBy sector contribution currency and deposits2.8%short-term securities9.0%long-term securities70.0%loans from central bank0.2%other loans17.9% secu r i tie 9 .0 % rm ie s % nk socialsecurityfunds0.8%localgovernment6.6%stategovernment9.9% y n t s tat e e rnmen t 9% centralgovernment82.7%By debt ho

47 lderBy residual maturity non-residentsof
lderBy residual maturity non-residentsof the membercountry52%other residentsof the membercountry7.8%central bank1.7%monetaryfinancialinstitute26.5%financialinstitute11.9% 52 % ide nt s mbe r r y % cen tra l b a n 1.7 % m onetar y financ ial over 1 and up to5 years33.6%over 5 years40.3%up to 1 year 26.1% 33.6 % 26.1 % Note: Data refer to EDP debt. Gross general government debt at nominal value and co