Changes in sovereign debt dynamics in Central and Eastern Europe

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. Since the beginning of the crisis many European economies have applied the so-called austerity fiscal policies, aiming at reducing the high levels of sovereign debt generated as a consequence of the drop in economic activity. However, it is not clear yet whether these policies have helped in reducing the high levels of debt. 

            This paper focusses on the analysis of debt sustainability, and changes in the degree of persistence of the public debt stock, for a group of Central and Eastern European Countries (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 countries are still yet to fulfil the Maastricht criteria and some others are members already of the Eurozone. Assessing the health of their sovereign debt stock levels, evolution and dynamics is key for the well-functioning of the euro area.

                    A number of papers have recently analysed the degree of sustainability of debt applying univariate time series econometrics, and more precisely, analysing the order of integration of the debt/GDP ratio or the deficit as a percentage of GDP, as a sufficient condition  for debt sustainability.  Hence, stationarity of the debt stock ratio is not a necessary condition for the transversality condition to hold. As aforementioned there are a number of contributions assessing the order of integration of the debt to GDP ratio.

            In this article we are interested in analysing how the way countries accumulate public debt may have changed, in particular after and before the ignition of the global financial crisis. We, then, combine tests for the order of integration of the variables with structural breaks. We use then methods to take into account 'broken' equations, and unit root tests that allow us to test for changes in the order of integration from I(1) to I(0) and from I(0) to I(1).