THE IMPACT OF THE PUBLIC DEBT STRUCTURE IN THE EUROPEAN UNION MEMBER COUNTRIES ON THE POSSIBILITY OF DEBT OVERHANG

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THE IMPACT OF THE PUBLIC DEBT STRUCTURE IN THE EUROPEAN UNION MEMBER COUNTRIES ON THE POSSIBILITY OF DEBT OVERHANG Robert Huterski, PhD Nicolaus Copernicus University in Toruń Faculty of Economic Sciences and Management Department of Finance

In a country with a public debt overhang, the problem of the structure of this debt should be treated with particular seriousness. The higher the level of the debt, the more important the characteristics of the debt components are for the likeliness of the given country to repay it. It is assumed that debt overhang manifests itself when the relation of public debt to GDP amounts to over 90%, though the phenomenon of debt overhang seems to be more qualitative than quantitative in nature and any parameterization can be debatable.

DEBT OVERHANG PUBLIC DEBT TO GDP IN 2016 AND GDP GROWTH HIGH 2016 10 year avg LOW 2016 10 year avg debt to GDP DEBT to GDP GDP growth debt to GDP DEBT to GDP GDP growth Greece 179,0-1,7 Finland 63,6 0,8 Italy 132,6-0,2 Netherlands 62,3 1,3 Portugal 130,4 0,1 Malta 58,3 3,6 Cyprus 107,8 0,9 Poland 54,4 3,8 Belgium 105,9 1,2 Slovakia 51,9 3,9 Spain 99,4 1,0 Sweden 41,6 2,1 France 96,0 1,0 Lithuania 40,2 3,0 United Kingdom 89,3 1,4 Latvia 40,1 2,6 Austria 84,6 1,3 Denmark 37,8 0,9 Croatia 84,2 0,7 Romania 37,6 3,1 Slovenia 79,7 1,5 Czech Republic 37,2 2,5 Ireland 75,4 4,5 Bulgaria 29,5 3,0 Hungary 74,1 1,3 Luxembourg 20,0 3,0 Germany 68,3 1,5 Estonia 9,5 2,5 Average 100,5 1,0 Average 41,7 2,6 LARGE DEVELOPED COUNTRIES POST-COMMUNIST COUNTRIES

DEBT OVERHANG 2007-2016 AVERAGE PUBLIC DEBT TO GDP AND GDP GROWTH HIGH 10 year avg 10 year avg LOW 10 year avg 10 year avg debt to GDP DEBT to GDP GDP growth debt to GDP DEBT to GDP GDP growth Greece 153,1-1,7 Netherlands 60,5 1,3 Italy 119,6-0,2 Slovenia 53,3 1,5 Portugal 107,7 0,1 Poland 51,2 3,8 Belgium 101,0 1,2 Finland 50,2 0,8 France 84,6 1,0 Slovakia 44,5 3,9 Ireland 82,2 4,5 Sweden 40,2 2,1 Austria 79,7 1,3 Denmark 40,0 0,9 Cyprus 77,7 0,9 Czech Republic 37,8 2,5 Hungary 75,6 1,3 Latvia 35,2 2,6 United Kingdom 75,2 1,4 Lithuania 33,4 3,0 Spain 73,8 1,0 Romania 30,3 3,1 Germany 73,3 1,5 Bulgaria 19,0 3,0 Croatia 66,0 0,7 Luxembourg 18,7 3,0 Malta 65,1 3,6 Estonia 7,8 2,5 Average 88,2 1,2 Average 37,3 2,4 LARGE DEVELOPED COUNTRIES POST-COMMUNIST COUNTRIES

The features of a correct structure of public debt most often include the following: as small a share of foreign investors as creditors as possible, as well as a small portion of debt issued abroad, a small share of debt in foreign currency, as long maturity period as possible, a big share of fixed-interest debt, a big share of productive debt in relation to deadweight debt.

Differences in the public debt structures among the EU countries Total general government gross debt (% of GDP) Estonia 9,5 Greece 179,0 Luxembourg 20,0 Italy 132,6 Bulgaria 29,5 Portugal 130,4 Share of short-term (<1 year) Bulgaria 0,3% Sweden 21,6% Poland 0,8% Hungary 18,5% Czech Republic 0,9% Portugal 16,7%

General government gross debt by sector of debt holder ( Non residents Malta 10,5% Cyprus 79,4% United Kingdom 25.5% Latvia 72,4% Sweden 29,4% Austria 71,3% Denmark 29.6% Resident financial Cyprus 17,3% Denmark 67.4% Latvia 24,0% Sweden 64,4% Lithuania 27,1% Luxembourg 63,4% Croatia 62,4% Resident non-financial Croatia 0,0% Malta 27,7% Slovakia 0,4% Hungary 18,1% Austria 0,5% Portugal 10,8%

General government gross debt by instrument (share) Currency and deposits Croatia 0,0% Ireland 10,6% Cyprus 0,0% United Kingdom 10,0% Hungary 0,2% Portugal 9,3% Debt Securities Estonia 11,1% Malta 93,3% Greece 18,2% Czech Republic 90,8% Cyprus 32,7% United Kingdom 88,1% Hungary 87,6% Loans United Kingdom 2,0% Estonia 86,6% Malta 5,5% Greece 80,0% Italy 7,8% Cyprus 67,3% Czech Republic 8,8%

Detailed research on the condition of public debt structure and providing the data on this to external entities do not constitute priorities for Eurostat. Simultaneously, it is a threat for the quality of monitoring the risk of debt overhang like a snowball effect. For the below institutional solutions which support building safe structures of public debt in the EU countries to function properly, it would be essential to collect and make available more complex data on multithreaded structure of this debt by Eurostat.

Taking into account the political character of the problem of public debt structure, it seems advisable to entrust fiscal institutions independent from the government with the role of monitoring in all the EU countries. Surely, a detailed scope of powers and obligations of such an institution is debatable, however, it is obvious that it cannot have extensive authority that would deprive the government of its powers. Independent fiscal institutions should first of all play the role of elements of an early warning system for phenomena increasing the risk of financial crisis in individual countries.

The European Commission maintains a database on its website and it publishes Scope Index of Fiscal Institutions (SIFI). Variations in the SIFI index for institutions between 21 and 90 points out of 100 indicate the lack of uniform standards of controlling the fiscal activities of particular governments in the EU countries. Establishing a certain chamber of independent fiscal institutions under the supervision of both the European Commission and the European Parliament would have certain image advantages and practical advantages.

Regardless of its institutional setting, an agency that would coordinate the functioning of independent national fiscal institutions and would be able to receive detailed, complete and comparable data on the countries fiscal situation including the public debt structure from them, could attempt to develop new models of assessing the risk of budget bankruptcy similar to the models used for enterprises.

CONCLUSION: In the author s opinion, appropriate monitoring of the public debt structure by relevant institutions in the European Union member countries together with a good coordination of those activities at European Union level would contribute to faster and fuller recognition of threats to the financial stability of those countries. Creating such effective mechanisms is not however possible without a deeper political and not only economic integration.