Debt Sustainability
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Want to be able to better understand why countries fail to make their debt payments? Curious about how to project the public debt of a country? Consider studying Debt Sustainability. Debt Sustainability is the ability of a country to make its scheduled debt payments without having to default on its loans and without having to undergo a drastic and sudden adjustment in its economic policies that would likely have adverse impacts on the country. Countries end up in debt because they need to borrow money to fund their spending, perhaps to run a fiscal deficit or to smooth government spending across years of different revenue. Sometimes, however, countries that are already in debt experience a negative credit shock, such as a natural disaster or a sudden drop in commodity prices, which make it suddenly much harder to repay their debts. The topic of Debt Sustainability is relevant to many different stakeholders and decision-makers, including private creditors, the IMF, and sovereign governments. The IMF regularly assesses a country's Debt Sustainability in order to decide whether to offer that country a loan, and if so how much.
What Does Debt Sustainability Include?
Economists consider many factors when assessing Debt Sustainability. The factors include the country's macroeconomic environment, its political environment, and its institutional environment. Macroeconomic fundamentals are an important part of debt sustainability because they influence a country's ability to generate economic growth and repay its debts. Political factors, such as the level of corruption and the strength of the government, can also affect a country's ability to repay its debts. Institutional factors, such as the availability of financial markets and the efficiency of the legal system, can also affect a country's ability to repay its debts.
