Tight Money and the Sustainability of Public Debt
One consequence of the recent global financial crisis has been the rapid growth of public debt in advanced economies, which has reached record-high peacetime levels. Emerging market and developing economies appeared more resilient immediately after the 2008-2009 crisis; however, declining commodity prices and decelerating growth during 2014-2016 have weakened their fiscal positions.
Faced with a growing debt burden, many governments have attempted to determine the ‘safe’ level of fiscal deficit and public debt. However, there is no single standard of fiscal safety for all economies. Experience shows that default risk may occur at various levels of public debt. In fact, a ‘safe’ borrowing level is country specific and depends on many factors and often-unpredictable circumstances.
Lessons from the latest crises also highlight the importance of more accurate estimations of contingent fiscal liabilities, namely those relating to the stability of the financial sector. Looking ahead, estimations of other contingent liabilities, particularly those related to social welfare systems (the implicit debts of the public pension and health systems) are of primary importance in the context of an aging society and a population decline.
The gross general government debt-to-GDP ratios in many advanced economies have reached the highest levels in peacetime history and continue to grow, putting into question sovereign solvency in these economies. In case of new adverse shocks, whether economic or political, global or country-specific, which result in the deterioration of growth prospects or higher real interest rates, or both, the situation could easily get out control. Apart from the risk of sovereign default, excessive public debt might also have a negative impact on the stability of financial sector and on economic growth in the medium and long term. Debt sustainability simulations for the group of highly-indebted advanced economies – those in which the general government gross public debt-to-GDP ratio exceeded 80 percent in 2015 – suggest that benefits of the current record-low interest rates and post-crisis growth recovery should be used for fiscal consolidation. The aim of this should be not only to stop further expansion of debt-to-GDP ratios, but also to gradually reduce them. Such corrective measures are needed in six out of seven G7 members (Germany being the exception) and in 10 out of 19 euro-area members. The fiscal situation of Japan, where gross debt has reached 250 percent of GDP, is particularly precarious. In addition, unless there are reforms of public pension, health and long-term care systems, fiscal consolidation in advanced economies must also create room for the higher spending levels in these areas that will result from aging populations.
The paper examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the country's banking system in early 2012. The author offers a credible estimate of the size of the country's state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the author's interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the country's banking sector.
The paper examines the principles for the supervision of financial conglomerates proposed by BCBS in the consultative document published in December 2011. Moreover, the article proposes a number of suggestions worked out by the authors within the HSE research team.