A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data

Marcio García · Roberto Rigobon B C

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Abstract

In this paper we study the question of debt sustainability from a risk management perspective.The debt accumulation equation for any country involves variables that are stochastic and closely intertwined.When these aspects are taken into consideration the notion of debt sustainability is expanded to studying the stochastic properties of the debt dynamics.We illustrate the methodology by studying the Brazilian case.We find that even though the debt could be sustainable in the absence of risk, there are paths in which it is clearly unsustainable.Furthermore, we show that properties of the debt dynamics are closely related to the spreads on sovereign dollar denominated debt.

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1997Inference in a nearly integrated autoregressive model with nonnormal innovations

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2012Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces 2008Estimating a fiscal reaction function: the case of debt sustainability in Brazil 2006Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A 'Fan-Chart' Approach 2006Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries 2007Debt Sustainability Assessment: The IMF Approach and Alternatives 2008Debt Sustainability Under Catastrophic Risk: The Case for Government Budget Insurance 2008Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey 2007Are Debt Crises Adequately Defined?

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