Changes in sovereign debt dynamics in Central and Eastern Europe

• Date: 01 January 2020
• Author: Juan Carlos Cuestas
• DOI: http://doi.org/10.1002/ijfe.1728
• Published date: 01 January 2020

RESEARCH ARTICLE

Changes in sovereign debt dynamics in Central and Eastern

Europe

Juan Carlos Cuestas

1,2,3

1

Department of Economics and IEI,

Universitat Jaume I, Castellón de la Plana,

Spain

2

Department of Economics and Finance,

Tallinn University of Technology, Tallinn,

Estonia

3

ResearchUnit, EestiPank, Tallinn,Estonia

Correspondence

Juan Carlos Cuestas, Department of

Economics, Avda. Sos Baynat s.n.,

Castellón de la Plana 12071, Spain.

Email: cuestasjuancarlos@gmail.com

Funding information

Agencia Estatal de Investigación, Grant/

Award Numbers: ECO2017‐83255‐C3‐3‐P

and ECO2017‐85503‐R; Fondo Europeo de

Desarrollo Regional

JEL Classification: C22; F15

Abstract

The aim of this paper is to shed some light on the degree of sustainability of

fiscal debt for a group of Central and Eastern European countries. We apply

a battery of time series econometrics methods to show how the financial crisis

has affected the debt‐to‐gross domestic product ratio and how the ratio has

behaved recently. The results give us important insights into how govern-

ments in Central and Eastern Europe have reacted to the accumulation of

debt. We distinguish between two groups of countries: one group where the

sovereign debt stock stabilized after the crisis, and another where debt has

been accumulated more quickly in recent years. The results provide important

policy lessons for the authorities responsible.

KEYWORDS

Central and Eastern Europe, debt, European integration, structural breaks

1|INTRODUCTION

The financial crisis that hit the global economy in 2008

after the collapse of Lehman Brothers in the United States

had a significant negative impact on the public finances

of most developed and developing economies. Because

the beginning of the crisis, many European economies

have run what are known as austerity fiscal policies

with the aim of reducing the high levels of sovereign debt

that were generated as a consequence of the drop in eco-

nomic activity. However, it is not yet clear whether these

policies have helped in reducing the high levels of debt.

Cuestas, Gil‐Alana, and Staehr (2014) find that in Spain,

for instance, where austerity measures have been quite

prominent, the degree of persistence of debt increased

after 2008. This may be explained by the high level of

unemployment that this country has chronically suffered

from. In addition, governments which lose their credibil-

ity face inherent fragility in a monetary union (De

Grauwe, 2012; Gros, 2012). This is because it is impossible

to use monetary expansion to finance a deficit within a

monetary union, and so the risk of default is high.

This paper focuses on analysing debt sustainability and

changes in the degree of persistence of the public debt

stock for a group of Central and Eastern European coun-

tries (CEECs). The analysis seeks to shed some light on

the current state of the public finances of these countries.

This is of particular importance as some of these coun-

tries are still yet to fulfil the Maastricht criteria, and

others are already members of the euro area. Assessing

the health of the levels, evolution and dynamics of the

sovereign debt stock in these countries is vital for the

euro area to function well. We closely follow Cuestas

and Staehr (2013), who contribute to the literature by

analysing the order of integration of the fiscal budget

balance for a group of CEECs. In this paper, however,

we aim not simply to test for unit roots but to look at

how the past debt stock contributes to the present fiscal

deficit with interest and how the relationship between

the two variables changes over time.

Received: 30 January 2018 Revised: 18 September 2018 Accepted: 21 March 2019

DOI: 10.1002/ijfe.1728

Int J Fin Econ. 2020;25:63–71. © 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 63