Zaaruka et. al. (2004) have applied co integration technique among revenues and expenditures of central government for assessment of debt sustainability of Namibia over the time period of 1990-2002. The study suggests that government debt of Namibia is sustainable and will remain sustainable in near future provided no shocks in macro-economic environment. Crose and Roman (2003) have focused on comparison of cross country fiscal sustainability assessment for monitoring fiscal stance and development of fiscal policy strategy for 12 countries for period of 1990s. The study suggests that fiscal sustainability is dependent on two factors i.e. interest rate – growth rate differential and ratio of difference between observed and targeted primary balance- to-difference between observed and targeted stock of public debt. The results of the study indicate that most countries in the sample need improvement in fiscal stance. The results of the study were verified by using Granger Causality test and estimating Vector Auto regressions. Ley (2003) has assessed sustainability of fiscal policy and sustainability of public debt burden in economy. The study suggests that while analyzing debt dynamics, the differential of interest rate and growth rate must be greater than zero and government could attain sustainability by generating large primary surpluses. Fiscal policy would be sustainable if solvency of government is satisfied i.e. equalization of primary budget surpluses and liability obligations. The study further suggests that current account balance is of primary importance while making analysis regarding sustainability of external debt. The study also considers exchange rate as an important component of external debt sustainability.
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on external debt burden of our economy, indicate the evidence of the actuality that high dependence on low value added and primary goods export is strongly connected with external debt problem as the world prices of these commodities are steadily declining for the last four decades and they are subjected to the sharp fluctuations. The significant negative relationship between external debt and the import to GDP ratio lies in the fact that the improved capital intensity is usually associated with better productivity and higher returns over the investment up to a certain limit. In the developing countries higher importation of capital goods leads to increase in domestic output of goods and services, which ultimately result in the less dependence on the import sector and thus reduce the external debt burden. According to above results exchange rate negligibly affect the external debt burden but this relationship is significantly negative shows that the higher exchange rate would reduce the external debt through improved revenues earned from exports. Finally the coefficient of terms of trade is positively and significantly at 10% level of significance is associated with external debt burden, proved the fact that the deterioration of the terms-of-trade is the factor undermining a country's ability to access international markets on attractive terms. In practice, countries with a low level of development and of integration in world trade lack credibility in international capital markets, thereby failing to attract private capital flows and becoming reliant on external public debt.
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Years ago, power was defined more in military terms and less in economic ones. Today, power is defined more in economic terms and less in military ones. While no military power can be built and sustained without a strong economy, military power has lost its capacity to achieve strategic objectives using violence only, as the wars in Iraq and Afghanistan have demonstrated. The longer it takes to solve the debt crisis, the more complicated other economic and social issues will become; and this in turn will strengthen the chances that a wider global economic crisis will occur and cause far reaching strategic changes. Such a development is likely to force all major world powers to devote a great deal of their energies to protect their interests instead of cooperating to grow their economies and foster world peace and stability. Since all states are in one boat sailing against strong winds, avoiding an impending global catastrophe demands that all powers cooperate and share sacrifices; and that all thinking leaders and leading thinkers of the world think collectively and creatively and humanely to guide our boat to safety.
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I find that the volatility of household debt burden and most the key variables presented tends to be relatively volatile and typically persistent through time Iacoviello and Pavan (2008) found that the correlation of US household debt and aggregate economic activity changed in the early 1980s. This paper went far beyond that to analyze findings on the changing characteristics of household debt correlations would emerge in different recessionary periods in Turkey. Rather than painting a picture of the correlation over a standard time frame, this paper has portrayed the correlations throughout time to provide a more thorough understand of the interaction between debt and the macro economy. The sample size used covers the three different recessionary periods: 2000-2013. While the correlation with debt and almost every other series experiences an increase in variability in the correlation during these periods, the magnitudes varied by series.
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Nevertheless, as addressed initially by Eaton & Gersowitz (1981) the above reasoning only addresses the ability but not the willingness to live up to the obligations of debt servicing. To deal with the latter question a political economy analysis is necessary, with voters and interest groups as the main agents. The outcome of such an analysis could describe cases where the political system pursues a macroeconomic policy that may be unsustainable in the long run. If the debt burden tends to infinity in the long run then the present economic policy certainly cannot be continued – but even in the case where the debt burden tends to stabilise at a finite but high level, the present economic policy could collapse because of unexpected refinancing problems. Yet there is no exact, critical maximum value for the debt burden beyond which a collapse of the economic policy will invariably appear. For a given debt burden the risk of a collapse depends on various factors in the economy. The following two sections describe a) the long-term dynamics of the debt burden and b) factors that may be important to assess the vulnerability of the present economic policy for a given debt burden.
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From the above analysis it is clear that Pakistan is experiencing a high growth in overall public debt with its composition changing towards high cost debt. Due to accumulation of high cost debt, ist servicing has increased sharply with a mounting pressure on budgetary resources. The debt has become a burden on the economy. There are various measures of debt burden used in literature. Some of them are reported in Table 6(a) & 6(b) in the context of Pakistan. Analysts attach different degrees of importance to each of these indicators, none of which alone provides an accurate prediction of a country’s capacity to meet its debt service obligations. The ratio of total debt outstanding to GDP is the basic indicator of the level of indebtedness of a country. It illustrates the burden of debt placed on the productive capacity of the economy. In Pakistan this ratio was slightly below 100% in 1998 and it surpassed this level in 1999 [Table 6(b)]. A cross-country comparison (Table 8) shows that it is a high ratio compared with other developing countries. Our debt to GDP ratio (at 106.7% in 1999) is more than double of the same for a sample of 15 developing countries (at 43.4% in 1999). Ratios of external debt to GDP and export are other indicators widely used by international investors while making judgements about a country’s creditworthiness. In Pakistan, external debt to GDP ratio increased from 38.4% in 1990 to 64% in 2001 [Table 6(a) & 6(b)]. External debt to export ratio also increased during the same period, though it showed some decline during the last few years. If we make a cross- country comparison, both these indicator are higher than the respective averages of the low- income countries. [Table 9(a)]. Comparison of these ratios and some other ratios is also made among countries in the sample grouped on the basis of indebtedness [Table 9(b)]. Other indicator used for similar purpose is the ratio of international reserves to external debt. International reseves act as a cushion against fluctuations in foreign exechange earnings. A country with high ratio of international reserves to external debt would be in a better position to service its debt. The rule of thumb for this ratio is a reserve to debt ratio above 18% is satisfactory. In Pakistan this ratio is not satifactory though it improved significantly to 6.1 % in 2001 from 4.5% previous year [Table 6(b)]. 12
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Public debt has a very significant role to play in mobilizing the resources for undertaking a larger volume of investments, which would not be possible otherwise. The internal borrowings, unlike the external borrowings, would not lead to an increase in the total quantity of the resources available and provide more resources for the Government. Hence, this method of financing the developmental activity is a non-inflationary method. If the Government borrows to finance its various investment projects, it would in its turn not only add to the productive potential of the economy, but would also create its own means of repayment. Hence, this method might not add to the total debt burden of the government.
This study examines whether public debt contributed to Malaysia’s economic growth for the period 1991 to 2013. The economic growth, as measured by GDP per capita, shows a negative association with the public debt. The other indicators of debt burden included in this study highlight the importance of improving the economic management. This could be in the form of improving the efficiency of the use of resources so that the debt burden can be effectively reduced. Malaysian policymakers should play an effective role in monitoring Malaysia’s public debt position, and close attention should be given to avoid the risk of being trapped in the debt overhang situation. Furthermore, there is a need to improve and effectively manage government consumption, as this would lead to improve of public debt. The regression results reveal that government consumption has a negative effect on economic growth, which means that government consumption does not stimulate economic growth; instead, over consumption by the government would be a burden to economic growth. Malaysia might need to try and follow some of the basic principles of economic practices, such as always spending within means. As a developing country, Malaysia has an average of high public debts, hence policymakers need to develop a sound financial plan to ensure that the public debt accumulated does not overweight future generations. The Malaysian government might need to improve the use of fiscal and monetary policy in an efficient way to reduce the dependence on public debt in order to achieve the vision 2020 objective of a high income and a developed country. Lastly, the Malaysian government might also need to place more emphasis on borrowing via Islamic bonds, which is borrowing from the public by allowing all participants to share in the real profits.
This result depends on the existence of frictions in the primary market as well as in the secondary market. If we eliminate the frictions in the primary market by letting the refinancing cost κ tend to zero, it can be seen (in Lemma 2) that the optimal refinancing frequency choice of firms tends to ∞: if there is no cost associated with reissuance, firms can choose debt that matures instantaneously and reissue continuously, which essentially gives investors the option to redeem their investment at any point in time. Since investors then can completely avoid the frictions in the secondary market, the interest rate on debt tends to zero. As this happens, firms can issue a larger and larger amount of debt. This allocation tends towards the first best, and the SP cannot improve on it in the limit. If instead we eliminate the frictions in the secondary market, by letting the rate at which matches arrive tend to infinity in a suitable manner, we can similarly see that the interest rate would tend to zero for any choice of δ (as investors do not need to be compensated for frictions in the secondary market), such that firms could choose δ = 0 and completely avoid the refinancing cost and hence the friction in the primary market. Again, as the interest rate tends to zero, firms can issue a larger and larger amount of debt. This allocation also tends towards the first best, and the SP cannot improve on it in the limit.
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The household debt-to-GDP ratio has been commonly used to measure the level of household indebtedness. However, a high household debt-to-GDP ratio may not necessarily imply that households are over-indebted or in financial distress (Bilston et al (2015)). The composition of household debt is an important consideration as some debt is taken on for the purpose of accumulating wealth, which, over time, can add to the financial buffer which can be tapped when required (Bank Negara Malaysia (2015c)). While the number of delinquent and impaired loans in Malaysia has remained low relative to total credit extended to the household sector, the attendant credit risk and its implications for financial stability should not be underestimated. Taking this into account, this paper explores the nexus between debt servicing capacity across the income spectrum and how individual borrowers respond to potential economic and financial shocks. To this end, the paper uses borrowers’ income and debt data obtained from a Bank Negara Malaysia internal database to calculate the borrowers’ financial margin.
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Jappelli et al (2013) find that, for the United States, the United Kingdom and European countries, relatively fast household debt growth does lead to larger increases in insolvency rates. The paper also highlights institutions as powerful determinants of household debt and default. Better judicial enforcement and information-sharing amongst lenders reduce lending risk and are associated with larger credit markets. Lending correlates with English legal origin of country. Bankruptcy procedures (and reforms when these take place) affect the sensitivity of insolvencies to household debt as well as the sensitivity to economic shocks.
Table 3 also shows the latest available data from 2012 on the actual allocation of Czech government debt across the considered options. The actual allocations are in some cases noticeably different from the estimated optimal ones. As discussed, one factor that could explain the mismatch between the actual and the optimal debt allocations is the underdeveloped market for inflation-linked bonds. But other factors could also play a role. Debt managers in the Czech Republic could be rather opportunistic in debt allocation overweighting perceived savings from larger allocation into short-term debt over the refinancing risk that derives from such allocation. However, one consideration that we have ignored, and that could justify larger allocations to short-term bills, are possibly larger cash management needs of the Czech government throughout the fiscal year to smooth the differences between the collation of government revenues and execution of government expenditures. Such needs could arise, for example, because of expected seasonality in government revenues that mismatch the government expenditure plans or from an overall inefficient implementation of government budget plans.
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In public (domestic) debt management, buybacks could be used both to elimi- nate “unfair” risk premium, that is only due to asymmetry of information between the government and the private sector and to reduce market imperfections as they can help improving liquidity and e¢ciency in the secondary market. As Missale (1999) points out how policy-makers approach to debt management implies a trade- o¤ between cost and risk minimisation, he argues that policy-makers have so far been mainly concerned with the minimisation of borrowing costs (“without tak- ing too much risk”) while the correct approach should be the opposite, provided that risk premia on government securities are “fair”, that is they re‡ect only their risk-return characteristics. In sum, the objective of reducing interest costs should
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Hutchinson (1995) found in his study that financial leverage had a positive effect on the firm's profitability. Taub (1975); Nerlove (1968); Bakar (1973); Petersen and Rajan (1994) and Nikoo (2015) also found a positive relationship between capital structure and profitability/financial performance of the firms. In addition, Roden and Lewellen (1995) found a positive relationship between profitability and total debt. Champion (1999) described that the use of leverage is one way to improve the performance of the firm. Hadlock and James (2002) argued that companies prefer debt financing because they anticipate higher returns. Abor (2005) examined the effect of capital structure on the corporate profitability of the listed firms in Ghana using a panel regression model. His measures of capital structure included short-term debt ratio, long-term debt ratio, and total debt ratio. Abor (2005) findings showed a significantly positive relation between the short-term debt ratio and profitability. Yogen et al. (2014) empirically investigated the relationship between capital structure and the firm’s profitability of banking industry in Kenya, using panel data which were extracted from the financial statements of the companies listed on the Nairobi Stock Exchange for the nine years period from 2004. Findings were reported that short term debt had significant positive relationship with the profitability.
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(calculated based on all future debt service) to the three-year backward- looking average of exports of goods and nonfactor services (excluding workers’ remittances) is smaller than or equal to 150 percent. Although this indicator has benefits, it also may be sensitive to shocks. Suppose, for example, that there is a peak in terms of exports at some point because of an increase in some commodity prices. Heavy indebtedness may not be observed then if the last three years of exports have been strong, but the country may still be in severe trouble if export prices fall over the next several years. Given the limitations of the export criterion, especially for countries with a high export-to-GDP ratio and a sensitivity to terms-of- trade shocks, the HIPC Initiative added a fiscal criterion of debt sustain- ability for countries that have an export-to-GDP ratio of at least 30 per- cent and a government revenue-to-GDP ratio of at least 15 percent. For HIPCs satisfying both of those thresholds, the HIPC Initiative considers an additional fiscal criterion: a HIPC’s external debt is sustainable if the ratio of the present value of public and publicly guaranteed external debt to government revenues is smaller than or equal to 250 percent. 8
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An optimal capital structure is a crucial financing choice of firm managers due to their aims to maximize the value of the firm. Capital structure is a mixture of a firm’s debt and equity (Brounen et al. 2006). Using debt or financial leverage is a common tool for most business to increase profit on equity and asset. According to (Jensen, 1976), a firm can benefit from debt because of the tax shield and the separation of agency cost. However, it has been argued that the more debt used, the higher cost of capital and bankruptcy cost the firm bears (Harris, M., 1991). Another reference of capital structure is a relation of financial funds of a firm for is operation. Furthermore, structure of capital is one of the key element for the f irm’s growth because stockholders is exact the real and important stakeholders in the firm as they can possess an enormous influences the firm in making decision process (Pirzada, 2015). Leverage, which refers to the proportion of a firm capital level, can come from either loans of banks or bonds (Ghosh, 2017).The two first authors who looked at this field are Modigliani and Miller, and they initially showed a no-relation between the structure of money funds in a firm with its profitability based on assumption of some perfect elements occurring (Nimalthasan, 2013). After that, a number of researches are related to examine how capital structure affects financial firm performance. As a consequence, the results include negative, positive and non-effects of financing structure and firm performance. This study is conducted to explore how the mixture of debt and equity affects the firm performance in listed Food and beverage companies in Vietnam.
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The research made use of secondary data source from the central bank of Nigeria (CBN) statistical bulletin 2008. The ordinary least square regression model was used to test the significant of relationship that exist between the Gross Domestic Product ( GDP ), as explained, variables on the national debt, national debt volatility and the lag of gross domestic product. The national debt volatility was obtained as the squared residual of national debt using the Autoregressive Conditional Heteroskedasticity (ARCH) using the Breush Pagan – Godfrey test for random shock test.The various dependent variables were also tested for the present of unit root. The Augmented Dickey - Fuller (ADF) test was adopted for a robust analysis. National debt, one lag of gross domestic product (GDP (- 1)) and national debt volatility were tested for present of a unit root. The decision criterion was based on the Markinnon (1996) one –sided p – values.
Financial distress has an important position in capital structure theories. Berk and DeMarzo (2007, p. 509) define financial cost as „when a firm has trouble meeting its debt obligations we say the firm is in financial distress‟. When a firm increases its proportion of debt to equity for financing its operations and future investments, the probability of default on the debt will raise as well (Kraus and Litzenberger, 1973). The cost arising from financial distress plays crucial role on the firm‟s future decisions such as, investment policy, cuts in research and development activities, advertisement and educational expenditures (Warner, 1977). All these decisions as an outcome of financial distress will affect firm‟s value negatively and lead to decline in the firm‟s value; therefore the wealth of shareholders will decrease as well (Arnold, 2008).
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A few papers incorporate public debt in VAR estimations. However, for the most part they test for the sustainability of debt, examine fiscal policy effects, or study other countries than the U.S., and more importantly, they do not study debt impulse responses. Further, these papers either use one lag of debt in VAR (Afonso and Sousa, 2009) that may result in misspecification, use public debt as one of the endogenous variables (Hasko, 2007, and Corsetti, Meier, and Muller, 2009), or use long-term cointegration approach (Boisinnot, L’Angevin, and Monfort, 2004, and Polito and Wickens, 2007).
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Abstract: It led to the decline of oil revenues below levels normalized by the public budgets of the worsening fiscal deficits and levels of public debt in Iraq. The sustainability of public debt and the ability of the government to track the flow of public spending and meet its future financial obligations are dominated by most economic and financial studies given the importance of fiscal sustainability framework in the design, implementation and effectiveness of macroeconomic policies including fiscal policy in particular. This study attempts to monitor and analyze the public debt trajectory in the Iraqi economy through the discussion of modern approaches in assessing fiscal sustainability in resource-rich countries, the design of the standard model based on self-regression approach for periods of Distributed delay Autoregressive Distributed Lag (ARDL) to assess the sustainability of the public debt during the period (1980-2015). And out a set of procedural policies guaranteeing the continuity of government debt service (internal and external) and to achieve justice between generations and the rebuilding of the fiscal space that allows fiscal policy room for maneuver during periods of boom and bust oil.