Stress Tests as a Tool to Assess the Risk of Public Expenditure on Debt Servicing Increasing at Local Government Entities
DOI:
https://doi.org/10.4335/17.2.205-224(2019)Keywords:
sub-central government, debt servicing costs, interest rate, riskAbstract
National and local government's public debt is of special interest to economic sciences. With interest rates in the EU countries now at historically low levels, there is risk of a trend change causing development expenditure to be crowded out from budgets in favour of debt servicing costs. The analysis (stress test) of the sensitivity of debt servicing costs in the local government sector in Poland to an unexpected growth of market interest rates above the values forecasted by the MoF confirms that local governments are exposed to interest rate growth risk, and consequently to the risk of their budgets incurring unplanned expenditure.
References
Ahiborn, M., Schweickert, R. (2016) Public debt and economic growth: Economic systems matter, Discussion Paper (Göttingen: Center for European Governance and Economic Development Research).
Avarri-Galera, A., Buendia-Carrillo, D., Lara-Rubio, J. & Rayo-Cantón S. (2017) Do Political Factors Affect the Risk of Local Government Default? Recent Evidence from Spain, Lex Localis – Journal of Local Self-Government, 15(1), pp. 43-66.
Bastida, F., Beyaert, A. & Benito, B. (2013) Electoral Cycles And Local Government Debt Management, Journal Local Government Studies, 39(1), pp. 107-132.
Boris, G. (2014) Implications of public debt on economic growth and development. A European perspective, IEB International journal of Finance, 9, pp. 42–61.
Checherita-Westphal, C. & Rother, P. (2012) The impact of high government debt on economic growth and its channels: An empirical investigation for the Euro Area, European Economic Review, 56, pp. 1392–1405.
Dallago, B. (2016) One Currency, Two Europes: Towards a Dual Eurozone (Singapore: World Scientific Publishing).
European Union (2011) REEN PAPER on the feasibility of introducing Stability Bonds (Brussels: European Commission).
European Union (2017) Reflection paper on the deepening of the economic and monetary union (Brussels: European Commission).
Fernandez-Perez, A., Frijns, B., Fuertes A. M. & Miffre, J. (2018) The skewness of commodity futures returns, Journal of Banking & Finance, 86, pp. 143-158.
Ghosh, A., Kim, J., Mendoza, E.,Ostry, J. & Qureshi, M. (2013) Fiscal fatigue, fiscal space and debt sustainability in advanced economies, The Economic Journal, 123, pp. F4–F30.
Huang, J., Su, C., Joseph, N. & Gilder, D. (2018) Monitoring mechanisms, managerial incentives, investment distortion costs, and derivatives usage, The British Accounting Review, 50(1), pp. 93-141.
IMF (2016) Analyzing and managing fiscal risks – best practices (Washington, D.C.: IMF).
Jones, M., Hilbers, P. & Slack, G. (2004) Stress Testing Financial Systems: What to Do When the Governor Calls, Working paper IMF, WP/04/127 (Washington D.C.: IMF).
Kluza K. (2017) Risk assessment of the local government sector based on the ratio analysis and the DEA method. Evidence from Poland, Eurasian Economic Review, 7(3), pp. 329–351.
Kluza, K. (2014) Changes in credit risk profile of Polish local governments. Assessment of unsystematic risk, XVIIth conference Financial Investments and Insurance Wroclaw, Poland, 17-19 September.
Kluza, K. (2014) Impact of the economic slowdown on local government investments, debt and productivity in the EU countries, Journal of Economics and Management, 18, pp. 26-39.
Lucianelli, G. & Citro, F. (2017) Financial Sustainability in Public Administration (Basingstoke: Palgrave Macmillian).
Megersa, K. & Cassimon, D. (2015) Public debt, economic growth and public sector management in developing countries: Is there a link?, Public Administration and Development, 35(5), pp. 329-346.
Palermo, T. (2014) Accountability and Expertise in Public Sector Risk Management: A Case Study, Financial Accountability & Management, 30(3), pp. 322-341.
Patillo, C., Poirson, H. & Ricci, L. (2002) External Debt and Growth, International Monetary Fund Working Papers in Economics, 69, (Washington D.C.: IMF).
Peterson G. (1998) Measuring Local Government Credit Risk and Improving Creditworthiness (Washington D.C: The World Bank).
Power, M. (2004) The risk management of everything, The Journal of Risk Finance, 5(3), pp. 58-65, https://doi.org/10.1108/eb023001.
Quinn, M. & Warren, L. (2017) New public management a re-packaging of extant techniques?, Qualitative Research in Accounting & Management, 14(4), pp. 407-429.
Reinhart, C., Rogoff, K. (2010) Growth in a Time of Debt, National Bureau of Economic Research Working Papers No. 15639 (Cambridge: National bureau of Evronomic Research).
Romp, W. & de Haan, J. (2007) Public capital and economic growth: A critical survey, Perspektiven der Wirtschatftspolitik, 8, pp. 6–52.
Shrithongrung, A. & Kriz, K. M. (2014) The impact of subnational fiscal policies on economic growth: A dynamic analysis approach, Journal of Policy Analysis and Management, 33, pp. 912–928.
Strang, K., Korstanje, M. & Vajjhala, N. (2018) Research, Practices, and Innovations in Global Risk and Contingency Management (Pennsylvania: IGI Global).
Vammalle, C. & Hulbert C. (2013) Sub-national Finances and Fiscal Consolidation: Walking on Thin Ice, OECD Regional Development Working Papers, 2013/02 (Parsi: OECD).
Vasilopoulos C. (2013) Financial Stress Testing. A model based exploration under deep uncertainty, PhD Dissertation (Delft: Delft University of Technology).
Zimmer, A., Gründl, H., Schade, C. & Glenzer, F. (2016) An Incentive‐Compatible Experiment on Probabilistic Insurance and Implications for an Insurer's Solvency Level, Journal of Risk and Insurance, 85(1), pp. 245-273.
