Debt in Times of Crisis : Does Economic Crisis Really Impact Debt?

Debt, private and public, and in particular excessive debt, has been debated to be one of the root causes of economic crises. At the same time, economic crises are believed to lead to an increase of debt. This book, through a range of contributors, explores certain constituents of an economy and attempts to identify their contribution to debt (public and private), especially in times of crisis; namely, bonds, tariffs, social security and non-performing loans (NPLs). Furthermore, it captures the (implicit) impact of the demography on debt through tariffs and social security and investigates the effect of quantitative easing/purchase programs and as well as crises on debt. In addition, the (cost of the) reserve that a state may want to provision for, in order to secure its economy from defaulting within a certain time horizon, is also addressed and calculated. This calculation offers an alternative valuation, or pricing, of (excess) debt (default protection). This book aims to offer a comparative study of countries - especially those with a history of excessive debt - and intends to realize whether an economic crisis can genuinely deteriorate debt, or whether the debt unsustainability is preexisting to the crisis. It will be relevant to students and researchers interested in economic policy and growth. Thomas Poufinas is an Assistant Professor at the Department of Economics, Democritus University of Thrace, Greece Preface Acknowledgments Contents Notes on Contributors List of Figures List of Tables 1 Debt Valuation: An Alternative Method to Avoid Future Default 1.1 Introduction 1.1.1 Trigger 1.1.2 Reserve Funds 1.1.3 Proposed Approach: An Insurance Pricing Technique 1.1.4 Resemblance and Differences with CDS 1.1.5 Benefits: Support to and from the Development of a European Safe Asset 1.1.6 The Role of the European Commission 1.1.7 The European Stability Mechanism (ESM) 1.1.8 Debt Sustainability 1.1.9 Originality and Novelty of the Approach 1.2 Background Discussion 1.3 Problem Description 1.4 Model Analysis 1.5 Numerical Application 1.5.1 Greece 1.5.2 Italy 1.5.3 Cyprus 1.5.4 Portugal 1.5.5 Spain 1.5.6 Ireland 1.5.7 France 1.5.8 Belgium 1.5.9 Other Countries 1.5.10 A Note on the Interest Rates 1.6 Global Evaluation of the Approach 1.7 Future Research 1.8 Conclusions References 2 The Impact of Quantitative Easing Policy on the Government Debt and the NPLs of the Eurozone Periphery Countries 2.1 Introduction 2.2 Literature Review 2.3 The Dataset 2.4 Methodology 2.5 Empirical Results 2.6 Conclusion References 3 Tariffs and Debt 3.1 Introduction 3.2 Literature Review 3.2.1 Public Debt 3.2.2 Private Debt 3.2.3 Tariffs 3.3 Problem Description and Theoretical Background 3.4 Data, Variables and Methodology 3.4.1 Data 3.4.2 Descriptive Statistics 3.4.3 Variables 3.4.4 Methodology 3.4.4.1 OLS 3.4.4.2 Fixed Effects 3.4.4.3 Random Effects 3.4.4.4 Dynamic Panel Data 3.5 Regression Summary 3.5.1 Results 3.5.1.1 Public Debt 3.5.2 Private Debt 3.6 Result Interpretation and Implications 3.6.1 Public Debt 3.6.2 Private Debt 3.7 Conclusions References 4 The Impact of Demographics on the Level of Tariffs 4.1 Introduction 4.2 Literature Review 4.3 Data, Variables and Methodology 4.3.1 Data 4.3.2 Variables 4.3.3 Methodology 4.3.3.1 Pooled OLS 4.3.3.2 Fixed Effects Model 4.3.3.3 Random Effects Model 4.3.3.4 Machine Learning 4.4 Results and Result Interpretation 4.4.1 Econometric Models 4.4.1.1 Robustness Check 4.4.2 Machine Learning Techniques 4.5 Conclusion References 5 Demographics as Determinants of Social Security 5.1 Introduction 5.2 Literature Review 5.2.1 Social Security Development 5.2.2 Social Security and Economic Growth 5.2.3 Second Demographic Transition 5.3 Data Variables and Methodology 5.3.1 Data 5.3.2 Variables 5.3.3 Methodology 5.3.3.1 Dynamic GMM 5.3.3.2 Machine Learning 5.4 Results and Result Interpretation 5.4.1 Econometric Models 5.4.1.1 Demographic Variables 5.4.1.2 Social Security Variables 5.4.1.3 Macroeconomic Variable 5.4.2 Machine Learning Techniques 5.4.2.1 Autonomous Pension Funds as a Share of GDP 5.4.2.2 Health Spending (as a Share of GDP) 5.4.2.3 Social Spending (as a Share of GDP) 5.4.2.4 Pension Spending (as a Share of GDP) 5.4.2.5 The “Unreasonable Effectiveness of Data” 5.5 Conclusion References 6 Debt and Social Security 6.1 Introduction 6.2 Literature Review 6.2.1 Public Debt 6.2.2 Private Debt 6.2.3 Social Security 6.3 Problem Description and Theoretical Background 6.4 Data, Variables and Methodology 6.4.1 Data 6.4.2 Descriptive Statistics 6.4.3 Variables 6.4.4 Methodology 6.4.4.1 OLS 6.4.4.2 Fixed Effects 6.4.4.3 Random Effects 6.5 Regression Summary 6.6 Results 6.6.1 Public Debt 6.6.2 Private Debt 6.7 Result Interpretation and Implications 6.7.1 Public Debt 6.7.2 Private Debt 6.8 Conclusions References 7 Debt Versus Non-Performing Loans: An Investigation on the Causality Direction Within the Countries of Eurozone 7.1 Introduction 7.2 Literature Review 7.3 Data Sources and Descriptive Statistics 7.4 Empirical Analysis 7.5 Results 7.6 Further Research 7.7 Conclusion References 8 What Drives Sovereign Bond Yields in the Eurozone? 8.1 Introduction 8.2 Literature Review 8.3 Data and Variables 8.4 Methodology 8.5 Empirical Analysis: Baseline Results 8.5.1 Robustness Check: The Role of Crisis Events 8.5.2 Robustness Check: The Role of the ECB Unconventional Monetary Policy Measures 8.5.3 Robustness Check: The Role of the Issue Currency 8.5.4 Robustness Check: South vs. North Country Bond Issues 8.6 Discussion 8.7 Conclusion References Index