by Dagmar Hartwig Lojsch Marta RodrguezVives THE SIZE AND COMPOSITION - PDF document

1 by Dagmar Hartwig Lojsch, Marta Rodrígu
by Dagmar Hartwig Lojsch, Marta Rodríguez-Vives THE SIZE AND COMPOSITION OF GOVERNMENT DEBT 1 We would like to thank Ad van Riet, Julia Catz, Remigio Echeverría, Reimund Mink, Francesco Mongelli, Hans Olsson, Gabriel Quirós, Philipp Rother, Roberta De Stefani, Tana Vong and an anonymous referee for their useful comments and suggestions. We also thank This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science NOTE: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors scientific/ops/date/html/index.en.html. 3ECBOccasional Paper No 132October 2011 NON-TECHNICAL SUMMARY 51 INTRODUCTION 72

2 A CONCEPTUAL FRAMEWORK FOR THE MEASUREM
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 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 nances, which t

3 akes existing government ces are uence
akes 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 differs 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

4 in the euro nancing and foreign holders
in the euro nancing and foreign holders. 7 ECBOccasional 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 rates 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 20

5 11. 2 of the euro area with the G7 count
11. 2 of the euro area with the G7 countries, see, for example, Rother 3 8 dence in the scal sustainability of government 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 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 e

6 xpressed in terms of level, per capita,
xpressed 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-earning 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 ‘snowball’ effect, where higher debt increases government interest expenditure, nanced by additional issuance of debt, causes a vicious circle that

7 may be detrimental to the sustainabilit
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 Rother, 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 context, nancial or non- nancial investment via transactions in deposits nance

8 its activities) and thereby also govern
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 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 by extensive li

9 terature 9 (see, for example, Giammariol
terature 9 (see, for example, Giammarioli et al. (2007), the European Commission (2009) and the ECB (2011)). 11ECBOccasional Paper No 132October 2011 A CONCEPTUAL FRAMEWORK FOR THE MEASUREMENT OF GOVERNMENT is the primary balance-to-GDP ratio at time t; cit spiral is a policy choice scal limit increases. They understand scal limit as an (economy-speci c) point nance themselves in the nances may affect overall ow of credit into the economy nances. As these nancing of the military. nancial crisis in the euro area. As another rm’s losses in order to allow its continued ned-contribution schemes), or pension 12ECBOccasional Paper No 132October 2011 ed, the contributors expect scal sustainability in the lled befo

10 re a nancial transaction takes place, e
re a nancial transaction takes place, e.g. guarantees nancial and economic crisis points to the nancial sector since 2008, nancial assets nancial derivatives or other asset positions might also be considered (as well nancial assets. Third, due consideration nances (see Section 4). Table 1 Financial assets (government has a claim that somebody Liabilities Balance sheet items (ESA 95) Currency and deposits Currency and deposits (EDP debt) Securities other than shares, excluding derivatives Securities other than shares, excluding derivatives (EDP debt) Financial derivatives Financial derivatives Loans granted Loans received (EDP debt) Shares and other equity Insurance technical reserves Insurance technical reserves Other acc

11 ounts receivable Other accounts payable
ounts receivable Other accounts payable Non-Þ nancial assets Produced Þ xed assets Non-produced assets Net worth (B.90) Off-balance-sheet items Implicit assets (e.g. additional revenue stemming from future taxes, broadening tax bases, increasing Implicit liabilities (e.g. unfunded PAYG pension Contingent assets Contingent liabilities (e.g. guarantees) 13ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT 3 THE SIZE OF GOVERNMENT DEBT ned in different ned to nancial corporations, ow of previous government cits. On top of these de cits, there are also cit, but do affect the government ow adjustment (SFA). This perspective xed or conditional on some other economic ation. The outstanding government nancial

12 assets nancial assets nancial as well
assets nancial assets nancial as well as non- nancial assets nancial assets held by the general government. nancial assets 3.1 GOVERNMENT LIABILITIES nition remains on gross rst concept of government debt in the euro nancial corporations sector (S.11) and ed as a public corporation, an institutional unit must cant prices (2008 nanced by the general government according ed inside the general government sector. 14ECBOccasional Paper No 132October 2011 ned as the gross debt of nancial derivatives and scal framework cit Procedure (EDP) and is scal surveillance, gures (e.g. the US and Japan) is not nition of (gross) government debt nancial derivatives, nancial instruments are In particular, the EDP does not use a

13 ny market prices for its 13 calculation
ny market prices for its 13 calculation (i.e. EDP debt is recorded at nominal or face value).The ESA “equity and other shares” category is excluded as most 14 government units, with some minor exceptions, do not issue Methodological comparison between EDP and ESA debt nancial assets of the general government are not subtracted in the calculation nancial instrument “EDP instruments”: currency and deposits; nancial derivatives; nancial accounts • “EDP instruments” are valued in nominal uctuations in the • Simplicity in the calculation of EDP debt cult to measure in practice) • EDP debt is directly applicable only in the • ESA debt provides a more comprehensive • ESA

14 debt allows the calculation of net debt
debt allows the calculation of net debt, • ESA debt facilitates international 15ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT The stock of government debt in the euro area, either EDP debt or ESA debt, shows a growing accumulation of liabilities due to the scal developments since 2007. In order to obtain a more detailed analysis of the reasons behind the increases in government debt ratios, equation (3) and Table 3 break down the change in the EDP debt ratio ) within the euro area into three contributing factors: (i) nominal GDP growth (g); (ii) general government de cit (expenditure – cit-debt adjustments (DDA). These amounts are calculated based on quarterly Þ nancial 15 accounts (consolidated

15 ) for the general government sector. Eur
) for the general government sector. Euro area government EDP and ESA 010206070100020308090currency and depositsloansshort-term securitieslong-term securitiesEDP debt forecastEDP debtESA debt 1999200120032005200720092011 Source: ECB calculations (based on Eurostat and national data), European Commission Spring 2011 forecasts (EDP debt for Change in general government debt-to-GDP ratio in the euro area (2007-12) 2007 2008 2009 2010 2011 1 General government gross debt 66.2 69.9 79.3 85.2 87.7 88.5 2 Change in debt ratio (2=3+4+5) -2.3 3.6 9.5 6.0 2.4 0.8 3 Nominal GDP growth -3.5 -1.6 2.3 -2.0 -2.5 -2.94 General government de cit (4=4a+4b) 0.7 2.0 6.3 6.0 4.3 3.54a Automatic stabilisers -1.0 -0.5 2.0 1.6 1.3 1.04b Other 1.

16 7 2.5 4.3 4.4 3.0 2.5 cit-debt adjustmen
7 2.5 4.3 4.4 3.0 2.5 cit-debt adjustment (5=5a+5b) 0.5 3.2 0.9 1.9 0.6 0.25a Of which support to 0.0 1.9 0.5 2.5 5b Of which other de0.5 1.3 0.4 -0.6 nancial crisis is 16ECBOccasional Paper No 132October 2011 cit (e.g. debt- nancial assets). +GDPtGDPtDDAtEXPt–REVt 1+gg GDPtDt–1 ects the cit deterioration scal stimulus measures on top of a signi scal impulse provided by automatic stabilisers, cit-debt adjustments ect the fact that the cits, primarily due to the nancial transactions undertaken by government nancial institutions in the nancial crisis (1.9% of GDP nancial crisis in 2008-10. This re ects the cits as a result of the 3.2 GOVERNMENT DEBT IN THE EURO AREA COUNTRIES A common starting point for the

17 assessment of sustainability risks is to
assessment of sustainability risks is to examine a country’s (explicit) government debt-to-GDP ratio. This is because high and rising government debt ratios indicate potential sustainability problems. Table 4 shows the evolution of the government debt-to-GDP ratio in the euro area countries. By the end of 2010, debt-to-GDP ratios in most euro area countries and the euro area as a whole exceeded the 60% reference value (the exceptions being Estonia, Luxembourg, Slovenia, Slovakia and Finland, while Spain and Cyprus were just above the 60% reference value). Looking ahead, the picture deteriorates further as the government debt ratio for the euro area countries is expected to continue its rise by 2012, with the exception of Ger

18 many and Malta. Moreover, Table 4 shows
many and Malta. Moreover, Table 4 shows that for most euro area countries the accumulation ed during the scal consolidation strategies are needed to stabilise government growth ratios in the short term in order to put them on a sustainable path. Experience during the period 1999-2007 showed that sizeable debt reductions were feasible, for example in Belgium, Ireland, Spain, Italy, the Netherlands, Slovakia and Finland. 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 3.2Ireland 48.2 25.0 96.2 117.9 -23.2 9

19 2.9Greece 100.3 105.4 142.8 157.7 166.1
2.9Greece 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 14.7Portugal 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 GO

20 VERNMENT ASSETS AND NET GOVERNMENT DEBT
VERNMENT ASSETS AND NET GOVERNMENT 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: 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 p

21 urchases by ects equity injections nan
urchases by ects equity injections nancial institutions in many countries nancial sector, nancial 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). 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

22 they mature or to nancial institution
they mature or to nancial institutions. The market value of cult to determine. In this respect, Eurostat c “decision tree” for valuing securities. Change 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 100806001008060 net debtfinancial assets 199920012003200520072009 21ECBOccasional Paper No 132October 2011 THE SIZE OF GOVERNMENT 3.4 GOVERNMENT ASSETS AND NET DEBT IN T

23 HE EURO AREA COUNTRIES nancial assets h
HE 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 in 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 sales of and nancial derivatives. nancial statistics between the euro area and the US and ed withi

24 n the cit and debt indicators are compi
n 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 derivatives) 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 2010, with 65% of the Comparable gov

25 ernment debt-to-GDP ratio for the euro a
ernment 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, which 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 Euros

26 tat and national data). Annex 2 provides
tat and national data). Annex 2 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 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 c

27 it and also on (explicit) government deb
it and also on (explicit) government debt cit through revenue and expenditure) or via nancial instrument 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 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 cas

28 e, the support measures were related to
e, the support measures were related to the capital injections for Allied nancial institutions and nancial markets nancial crisis, accessible via the following link: Cumulative financial sector stabilisation operations and their impact on government Measures impacting on government debt (2008-10)Measures impacting on Capital injectionsAsset of sharesLoans5.70.00.00.115.828.01.90.011.10.50.00.00.00.07.00.00.016.20.0125.2125.21.60.00.00.725.127.40.00.02.40.00.20.00.00.04.723.60.30.00.00.00.00.00.00.017.217.2Luxembourg6.10.00.00.00.00.00.00.05.80.82.40.02.10.00.00.47.817.61.20.02.20.33.111.70.00.00.43.56.133.30.00.00.00.00.00.00.00.01.50.13.50.56.513.1 27 ECBOccasional Paper No132October 2011 OFF-BALANCE-SHEET ASSETS AND Irish

29 Bank, Bank of Ireland and Anglo Irish B
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 also 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 during 2010. In the Netherlands, the measures to support Fortis, ABN AMRO and ING resulted in a remarkable c

30 umulative increase in (explicit) governm
umulative 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 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 such nancial entities managing

31 ciary euro area countries, as will scal
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 risk 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 illustr

32 ate gures for the euro IMPLICIT LIABILI
ate gures for the euro IMPLICIT 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, 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 GDP2007-60GDP2007-606.9Luxembourg4.8Mal

33 ta0.4Netherlands8.9Austria15.9Portugal9.
ta0.4Netherlands8.9Austria15.9Portugal9.0Slovenia2.7Slovakia1.6Finland 31 ECBOccasional Paper No132October 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 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 33

34 ECBOccasional Paper No 132October 2011
ECBOccasional Paper No 132October 2011 THE COMPOSITION OF GOVERNMENT 5 THE COMPOSITION OF GOVERNMENT DEBT uences both a government’s costs and ce, tries to minimise 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-tem 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 f

35 or 9%, and loans from nancial instituti
or 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 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. Regarding the nancing risk, the government could face a Chart 6 (percentage of total)By type of instrumen

36 tBy sector contribution currency and dep
tBy 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 holderBy 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 consolidated between sub-sectors of gov

37 ernment. 35ECBOccasional Paper No 132Oct
ernment. 35ECBOccasional Paper No 132October 2011 THE COMPOSITION OF GOVERNMENT nance its de cit and roll over le of their liabilities, while ation or frequent nancial ation-sensitive liabilities or diversify ation-linked bond markets in the euro area ation-indexed bonds in nancial turbulence was a major obstacle ation-linked bond market in 2009-10. nancial markets triggered a major sell-off of ation-linked bonds, whose prices, in the light ation-linked bonds since 1998. ation-indexed bonds only in 2000-02. a) Ratio of inflation-indexed government debt to total b) Issuance of inflation-linked government bonds 20032004200520062007200820092010 1998200020022004200620082010 Source: Dealogic database. 36ECBOccasional

38 Paper No 132October 2011 nancial insti
Paper No 132October 2011 nancial institutions (MFIs) (i.e. credit nancial corporations (i.e. insurance nancial auxiliaries, nancial corporations engaged in lending) cant proportion of government Resident creditorsNon-resident Total residentsCentral bankOther MFIsOther (a)(b)(c)(d)(e) nancial crisis is consolidated. 37ECBOccasional Paper No 132October 2011 THE COMPOSITION OF GOVERNMENT Table 15 provides information about the residual maturity of government debt. The highest proportion is typically represented ve years. For example, by the end of 2010 Estonia, Slovenia and Austria held more than 50% of their government debt in instruments with residual ve years, while for Greece, Italy, Cyprus, Slovakia, Spain, Portugal,

39 Malta, Finland and Belgium the share of
Malta, Finland and Belgium the share of instruments ve years was between 40 and 50%. Residual maturity at up to one year was particularly high in France, Germany and the Netherlands, in addition to Portugal which is subject to EU/IMF support. A high share of debt maturing in the short term and/or a high share of debt with a variable interest rate will sensitise countries to nominal interest rate developments. The need to maintain price stability is thus crucial for Currency denomination nancial crisis is consolidated. 38ECBOccasional Paper No 132October 2011 maintaining favourable market conditions and nance at low cost. Likewise, debt instruments with variable interest rates may also be a preferred option for those investor

40 s having to pay variable interest on the
s having to pay variable interest on their liabilities. As shown in Table 15, the higher share of government debt instruments with a variable interest rate is discernible in Greece, Finland and Cyprus, where some 29%, 27% and 10% of total government debt has a variable interest rate. To illustrate historical developments more clearly, Chart 8 shows 10-year government bond yield spreads vis-à-vis Germany. To some extent the elevated spreads in the past three years for some countries are comparable to those already observed previously, for example in the period between 1994 and 1995. The rapid decline in spreads between 1996 and 1998 is often attributed to the consolidation effort related to the introduction of the single currency

41 . In particular, governments’ willi
. In particular, governments’ willingness to comply fully with scal criteria was one of the key determinants of government yield convergence and spread decline in that period together with disappearing exchange rate risk premia. It can be expected that a similar determination to that seen in the 1990s will be necessary to bring the currently observed high values of spreads in some of the countries closer to their pre-crisis levels. le (or average residual maturity) nancing risk. Initial nancial instrument Chart 9 (a) provides a more detailed breakdown of outstanding euro area government debt Spreads of 10-year government -50150350550-50150350550 199419961998200020022004200620082010 AustriaFinlandFranceItalyNetherlands

42 -50150350-50150 BelgiumSpainGreeceIrelan
-50150350-50150 BelgiumSpainGreeceIrelandPortugal 199419961998200020022004200620082010 -5050150250-5050 SloveniaSlovakiaMaltaCyprus 199419961998200020022004200620082010 39ECBOccasional Paper No 132October 2011 THE COMPOSITION OF GOVERNMENT securities and associated changes between 2010, roughly 22% of euro area government debt securities were maturing within one year, roughly 37% will mature at between one to ve years, and roughly 41% of government ve years. As shown in Chart 9 (a) the average residual maturity of euro area government debt securities has been hovering around 6 and 7 years since December 2007 on a slightly Euro area country developments are depicted in Chart 9 (b). Ultimately, as documented nancial crisis shif

43 ted the environment in which the soverei
ted the environment in which the sovereign debt managers operated: the cut in monetary policy rates generated a steep yield curve. Changes in monetary policy and perceptions of governments’ solvency altered the risks and opportunities for debt managers, which led in some cases to the implementation of short-term interest cost minimisation strategies during the crisis. Indeed, the chart shows remarkable changes in the share of short-term government debt. The most visible changes were recorded in Cyprus, Greece and Spain where the share of short-term debt declined between 1995 and 2010 by 54.5 p.p. in Cyprus, 20.4 p.p. in Greece and 13.6 p.p. in Spain, signalling the reduction of rollover risk. In some countries, the share of

44 short-term government debt rapidly decli
short-term government debt rapidly declined as a consequence of the improvement in the capital market. On the other hand, opposite developments were recorded in Germany, the Netherlands and Finland where the share of short-term government debt increased respectively by 13.4 p.p., 12.8 p.p. and 6.5 p.p. a) Outstanding amount of euro area government debt b) Short-term government debt (percentage of GDP, Dec.Dec.Dec.JuneJuneJune 2007200820092010 0510152005101 Belgium2 Germany5 Spain9 Luxembourg10 Malta11 Netherlands12 Austria13 Portugal19952010 12345678910111213141516 40ECBOccasional Paper No xxxXxxxxx 2011 nances are scal surveillance greater prominence to government debt and the nition used, has been growing in net and nan

45 cial and scal surveillance in the EU. A
cial and scal surveillance in the EU. At the same nancial assets held by governments nancial market concerns about tackle this rather complex issue which potentially nancing and foreign holders. cits combined with rapidly growing gross nances in the See, for example, ECB (2011a).41 41 ECBOccasional Paper No 132October 2011 REFERENCES nancien”, CPB Document 150, Centraal Planbureau. cit and Its Implications for Policy 42 cit to debt: bridging the gap”, Monthly Bulletin, April, scal sustainability in the euro area”, Monthly Bulletin, April, pp. 61-77. cation. A reconstruction ation-linked Bonds from a Central Bank Perspective”. 43 ECBOccasional Paper No 132October 2011 ecting Pensions in National

46 Reinhart, C. M., and Rogoff, K. S. (2008
Reinhart, C. M., and Rogoff, K. S. (2008), “The Forgotten History of Domestic Debt”, ts of Fiscal Consolidation in Uncharted scal policies and the crisis”, ECB Occasional Paper, 44ECBOccasional Paper No132October 2011 I GOVERNMENT EDP DEBT IN EURO AREA COUNTRIES OVER THE PERIOD 1999 TO 2012 Government EDP debt in euro area countries over the period 1999 to 2012 0204060801001201601800406080100120160180 1999200120032005200720092011 010203040507080010203040507080 1999200120032005200720092011 EstoniaCyprusLuxembourgNetherlandsSloveniaSlovakiaFinlandMalta Sources: ECB calculations (based on Eurostat and national data) and European Commission Spring 2011 forecasts (EDP debt for 2011-12). 45ECBOccasional Paper No132

47 October 2011 2 FINANCIAL ASSISTANCE PROV
October 2011 2 FINANCIAL ASSISTANCE PROVIDED TO EURO AREA COUNTRIES VIA BILATERAL LOANS AND THE EFSF EFSF disbursement to IrelandEFSF disbursement to Portugal2010201120122013Total201120122013Total2011201220132014Total0.81.30.70.23.00.40.20.10.70.50.30.10.11.05.810.35.21.622.93.41.20.55.13.82.40.90.57.6--Ireland0.3---0.3---------Greece--Spain2.64.52.30.710.11.50.50.22.31.71.10.40.23.3France4.47.73.91.217.22.60.90.43.92.81.80.70.45.7Italy3.96.83.41.015.12.20.80.43.42.51.60.60.35.0Cyprus0.00.10.00.00.20.00.00.00.00.00.00.00.00.1Luxembourg0.10.10.10.00.20.00.00.00.00.00.00.00.00.1Malta0.00.00.00.00.10.00.00.00.00.00.00.00.00.0Netherlands1.22.21.10.34.80.70.20.11.10.80.50.20.11.6Austria0.61.00.50.22.30.30.10.10.50.40.20.10.10.8Portuga

48 l0.50.6--1.10.1--0.1-----Slovenia0.10.20
l0.50.6--1.10.1--0.1-----Slovenia0.10.20.10.00.40.10.00.00.10.10.00.00.00.1Slovakia-----0.10.00.00.20.10.10.00.00.3Finland0.40.70.30.11.50.20.10.00.30.20.20.10.00.5Euro area20.735.517.65.479.211.84.11.917.712.98.33.01.726.0--0.20.20.4-----------0.30.30.6-----United Kingdom-----1.11.81.03.8-----Non-euro area-----1.12.31.54.8-----Notes: EFSF assistance is assumed to be a constant share of the total assistance provided to Ireland and Portugal over the period 2011-13. OCCASIONAL PAPER SERIESNO 123 / FEBRUARY 2011by Ettore Dorrucciand Julie McKayTHE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS OCCASIONAL PAPER SERIESNO 132 / OCTOBER 2011by Dagmar Hartwig Lojsch,Marta Rodríguez-Vivesand Michal SlavíkTHE SIZE AND COMPOSITI