DebtRisks · Public Debt: Risk Management and Restructuring Optimization
Horizon 2020 — Marie Skłodowska-Curie Actions
- Duration
- 2016-06-01 → 2018-12-31
- EU contribution
- €218,094
- Participants
- 2
- Scheme
- MSCA-IF-GF
Lines connect the coordinator with its partners.
Results in brief
Public Debt: Risk Management and Restructuring Optimization
The over-arching challenges revealed by the eurozone crisis were imprudent public debt management, weak macroeconomic management, and debt overhang. This project develops the capacity for risk management of public debt, pursuing three board objectives: 1. Develop an asset-and-liability management framework for risk management of public debt 2. Operationalize the framework using multi-period stochastic programming integrated with multi-factor simulation 3. Extend the optimization model to incorporate debt sustainability analysis and study debt restructuring In the aftermath of the 2008 global financial crisis sovereign debt increased sharply in most advanced economies. Average public debt increased by one third from trough to peak, with almost all countries experiencing a significant increase. In the euro area, public debt rose too about 84% in 2010, which decisively contributed to a sovereign debt crisis in the region, with five countries (Greece, Ireland, Portugal, Spain, Cyprus) requiring external financial assistance. The fact that public debt levels have barely declined since then, have prompted a renewed interest in debt sustainability analysis and have led to intense policy discussions. Our project addresses important questions relating to the debt sustainability of sovereigns. It incorporates optimal debt-financing decisions for an economy facing uncertain economic growth, interest rates, and fiscal balance to address some important questions: How do issuance strategies trade-off interest costs and refinancing risks? Through which channels do they influence debt flow and stock dynamics? How do these interactions depend on the stock of legacy debt, risk tolerance, or the sensitivity of interest rates to debt? What additional efforts and when, could render sustainable a given debt stock level? The answers have significant implications for the public. The project also considers the use of contingent debt for sovereign debt risk management, either as stand-alone instruments that facilitate risk sharing with the markets, or in the context of an asset-liability management framework
Data: CORDIS, © European Union
Project objective
Much we have been learning about the flawed design of eurozone form the current crisis. Non-optimality of euro as a currency zone, banking system fragmentation, weak institutional structures, insufficient political integration, lagging competitiveness and global imbalances, are all blamed for the crisis. At a country level problems are attributed, according to The World Bank and IMF, imprudent public debt management, weak macroeconomic management, and debt overhang. Our project looks into these over-arching challenges with the broad objective to: ""Develop the capacity for risk management of public debt that can be used in response to crises, and to analyze policy proposals for debt restructuring and common assumption of debt in a currency union"". The eurozone crisis challenges us to develop our capabilities for public debt management and advance the state-of-the-art.This is the purpose of the project. The four specific research tasks, taken together, advance the broad objective: 1. Develop an asset-and-liability management framework for risk management of public debt. 2. Operationalize the framework using multi-period stochastic programming integrated with multi-factor simulations. 3. Extend the optimization model to incorporate debt sustainability analysis and study debt restructuring of crisis countries.4. Extend the simulation models to integrate current proposals for EU-bonds in public debt risk management. The project is devoted to complementing existing skills and broadening the fellow's knowledge base to develop models for asset-liability management optimization and EU-bond pricing, implement and calibrate them using market data, and demonstrate their efficacy in addressing policy issues for public debt management in crisis countries. The models will be tested in depth on the interesting case of Cyprus, for which we have special knowledge and data, on IMF stylized examples, and for the Italian and Argentinean debt where we also have access.""
Original text from CORDIS.
Participants
- UNIVERSITY OF CYPRUS · NicosiaCoordinatorCyprus
- THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA CORP · PhiladelphiaUnited States
Links
- View on CORDIS
- DOI: 10.3030/655092
- https://arquivo.pt/wayback/20211014225427/https://www.researchgate.net/project/Sovereign-Debt-Risk-Management
- https://www.researchgate.net/project/Sovereign-Debt-Risk-Management
Data: CORDIS, © European Union