Sovereign Debt Risks Under The Perspective Of Implicit And Contingent Liabilities

The defining feature of sovereign debt is the limited mechanisms for enforcement.This distinguishes sovereign debt from private debt.A private agent or corporation,at least technically,is always subject to a legal authority.If a sovereign debtor fails to make a contracted payment,creditors have limited legal recourse,relying only on overseas legal instruments and reputational considerations.Reinhart & Rogoff(2009)points out that sovereign debt defaults is nothing new,and decision makers need to focus on the total debt of countries.Economists normally attribute debt crisis to recession,capital flight or currency depreciation.But Europe's "debt economy" makes it more complicated.The outbreak of the global financial crisis reveals contingent liabilities' true features.Government guarantees and social security spending rising make the sovereign debt risk simmering.Under this background,the research on sovereign debt risk will also be involved in a series of new academic problems.This paper argues that the European sovereign debt crisis stems from implicit and contingent liabilities.After a thorough literature reviews,following problems are identified in terms of implicit and contingent liabilities:(1)Figuring out the implicit and contingent liabilities in macro level.(2)The change trend of future debt.(3)The formation mechanism of hidden contingent liabilities based on the microscopic study.(4)The feedback mechanism for sovereign debt risk.According to the trigger condition and mandatory,this paper will divided sovereign debt risk into two levels.One is pension implicit debts which derived from the social security expenditure.The other is the result of the government's financial rescue behavior which might produce contingent debt.Through analysis of the formation mechanism,this paper builds a theoretical model and adopts data of European countries for empirical test.Chapter 1,introduction.This chapter includes research background,current development,research perspective and research method,main innovations in this research.Chapter 2,a literature review of theoretical foundations of implicit and contingent liabilities.Implicit liabilities are mainly refers to the promised payment,which generally does not reflect in the government's balance sheet,such as the future of pensions,health insurance and other social security.Contingent liability is the liabilities when a specific event occurs which is not reflected in the budget.Due to the mutual transformation between implicit liabilities and contingent liabilities,this article focuses on the risk source.Chapter 3,the evolution of the sovereign debt related theory.Sovereign debt theory generates from national finance theory,so debt risk is one of the financial risks.The discussion of debt risk initially comes from the pros and cons of economic development,and then it puts forward the moderate of government debt.At the end of last century,the financial risk matrix used to analysis for macro problems.With the outbreak of the debt crisis in the developed countries,the sovereign debt risk theory is not only confined to the public sector,but also including the residents and enterprise departments.Chapter 4 deals with the transmission mechanism of debt risk.According to the practical background of the Europe's sovereign debt crisis,sovereign debt risk comes from the ageing of population structure,social security mismatch,government guarantee and financial aid under the perspective of implicit and contingent liabilities.By building two sector mode of government and resident,this paper analysis representative's finance net contribution.Through the government-enterprise-bank three sector models,this paper analysis financial rescue behavior which led to the doom loop between government and financial institutions.Chapter 5 and Chapter 6 are empirical studies.Based on the panel regression model,the mediating effect model and panel vector autoregressive model,empirical research results show that the elderly dependency ratio,pension replacement rate has significantly effects on the debt scale.And population aging has a significant positive influence on sovereign debt risk.“Demographic dividend for the second time” did not improve the sustainability of sovereign debt.Aging of the elderly would lead to greater debt risks by comparing with aging population.Third,after the financial rescue,sovereign debt risk gets rising.As holders of sovereign debt,the financial sector risk increases accordingly in the short term.Chapter 7 is the conclusion and the inspiration to our country.Sovereign risk is corresponding to the concept of generalized government debt in China.Although our country direct government debt risk is not high currently,but the aging pension gap,local government financing platform debt and corporate sector debt problems have been revealed.The experiences and lessons of European countries may help us cope with risks.Theoretical and empirical studies have found that(1)the source of implicit and contingent sovereign debt is varied,such as war disaster and emergency.Combined with present situation of the European countries,the governments face the debt risk come from population,welfare and finance.(2)Aging population will restrict the economic development of Europe and the developed countries in the future for a long time,and reduce the government fiscal strength at both revenue and expenditure.(3)The generous welfare system in Europe contributed to the financial burden,especially in Greece.(4)The government's rescue of financial institutions underscores the sovereign debt risk in the short term.As holders of government bonds,the banks' asset quality is affected by the declining of government credit.There is a doom loop between banks and sovereign sectors.The innovation of this article mainly includes the following three aspects.(1)This paper analyzes the formation mechanism of implicit government debt,combining the financial risk theory and contingent liability theory,and provides a new research perspective for the framework of government debt risk analysis.Although domestic and foreign scholars have conducted in-depth analysis about the appropriate scale of national debt and the calculation of national balance sheet,there is no uniform research paradigm in the form of implicit liabilities and contingent liabilities.(2)Second,the measure of sovereign debt risk needs to be considered implicit contingent liabilities.Financial institutions are the holders and guarantors of government bonds.The valuation of government bonds is bound to affect their rights and interests.There is a doom loop mechanism between government credit risk and financial sector credit risk.Population aging will be restricting the economic development of Europe and even developed countries for a long time.Unmatched welfare system deteriorates the financial situation of the relevant countries further.(3)This paper constructs the fiscal gap model and the default probability model,and discusses the mechanism of implicit contingent debt transmission from the government,the residents,the enterprises and the banks respectively.Using the two-way fixed effect model,panel vector autoregressive and mediating effect model,this paper introduces the financial sector credit default swap(CDS)and the old age support ratio as an explanatory variable to examine its impact on sovereign debt risk.