To highlight related but conceptually distinct elements of fiscal risks and vulnerabilities, the six tools presented in the paper are organized mainly by their time horizon. Indicators measuring short-term pressures include (i) the size of a country’s gross financing needs, with a view to capturing its potential funding risks; (ii) high frequency market-based measures of sovereign default risk such as CDS spreads; and (iii) a measure of potential spillovers in distress dependence among advanced economies. Indicators that assess medium- to long-run vulnerabilities use lower frequency data. They include (iv) a measure of the required fiscal effort to stabilize debt in the medium and long run; (v) the impact of adverse growth and interest rate shocks on the baseline debt trajectory; and (vi) a probabilistic measure of the debt outlook reflecting risks associated with baseline debt projections. Together these tools cover a broad scope vulnerabilities and risk. The necessary data are available for most advanced economies with little time lag. Going forward additional aspects will need to be systematically covered, e.g. the investor base and level of contingent liabilities.
The paper presents the intuition of the various tools as well as technical details. Moreover, it illustrates how the tools can be used to gauge fiscal vulnerabilities and risks based on the data from the September 2011 Fiscal Monitor.
The illustrative application of the indicators and tools highlights the complexity and interconnectedness of different dimensions of vulnerabilities and related policy options. While for a few countries fiscal vulnerabilities appear large on all fronts, for most others vulnerabilities are concentrated in particular areas. Expanding the existing strengths can be one way of mitigating vulnerabilities in other dimensions. The use of a set of indicators and tools, as well as a comparison of countries against their peers can be a useful way of identifying and communicating key areas of concern as well as policy requirements and options.
[1] Prepared by Andrea Schaechter, C. Emre Alper, Elif Arbatli, Carlos Caceres, Giovanni Callegari, Marc Gerard, Jiri Jonas, Tidiane Kinda, Anna Shabunina, and Anke Weber.
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