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Public debt no longer consists of external debt. Domestic debt is a growing part of total public debt. Private external debt is a rising proportion of total external debt. ЁngZZoZЕZZзЕѓŸЈ% Theoretical Notion of SustainabilityЁ&& ŸЈХ Solvency: present value budget constraint Problems No specific constraints over debt and deficits at any point in time. Uncertainty: Key parameters are non- stationary ЁЪZZ0Z ZZEZZ9ZZZ <F9    ѓŸЈ*The Standard Framework: Debt StabilizationЁ++ ŸЈяConditions for public debt stabilization Problems with thresholds; more serious than HIPC because of unstable lender behaviour ES: Same framework. Transfer of resources Evolution of external and public debt in the course of developmentЁ*ЌC№ѓŸЈ ShortcomingsЁ  Ÿ "Neglect of endogeneities and feedbacks: Treatment of key parameters as if they are independent  growth, fiscal and current account balances, debt levels, risk premium and interest rates, exchange rates. Neglect of cumulative interactions; vicious and virtuous circles. Ёf)ZшZZ&  Є A ѓ ŸЈ#Neglect of links between FS and ES:Ё$$$ŸЈтFS: an internal transfer problem only? No distinction between domestic and external debt; neglect of forex constraints But external imbalances and BOP crises alter key parameters effecting FS. Socialization of private debt ѓ ŸЈ Ё(ŸЈн ES : An external transfer problem? Public and private surpluses Importance of the division of external debt between public and private sectors Internal transfer problems leading to BOP difficulties: LA in the 1980s. ѓ ŸЈ Trade offs Between FS and ESЁ ŸЈž Asymmetric effects of growth and exchange rate shocks on budget and current account Conditions favouring FS but causing external fragility and vice versa. ѓ Ÿ &The Fund s ApproachЁ ŸЈеStandard framework; same shortcomings. FS: Stabilization of the debt ratio, no threshold Baseline scenarios; debt projections Stress tests ES BOP and external projections 40% threshold, used with discretion.Ё|'`E)_ E  ѓ ŸЈOptimistic ProjectionsЁ ŸЈЂInvariably projects falling debt ratios; more optimistic for external than public debt Misses by large margins Greater optimism for countries with Fund programsѓ ŸЈ OptimisticЁ  $Ÿ  Optimism about private investment and growth’! misses fiscal targets ’! misses debt projections. Stress tests almost meaningless: translates falling to stable debt ratios. Early warnings: cannot predict if simulated shocks could actually occur or lead to crises. Analytical difficulties yes. But also faults in economic thinking. Too much confidence in the policies promoted. Ё^P," " :ѓ ŸЈ Capital Flows and SustainabilityЁ!! ŸЈљ Still believes in Lawson Doctrine? Little attention to external imbalances if driven by free capital flows and floating. Lessons: Debt crises often follow currency crises. Need to check surges in arbitrage inflows and external fragility. IMF aversion to control over inflows even when monetary policy is powerless to stabilize the currency. Has the Fund really learned on capital account issues? Is there a new paradigm, as claimed by the IEO? Policy advice. Turkey versus Argentina and Thailand.ЁњZњѓ ŸЈCurrent Vulnerabilities Ё  (Ÿ иFavourable global conditions. Debt ratio fell by 8%. Currency appreciations contributed 6%. Significant fiscal savings from low spreads/rates. Strong commodity prices and growth added to revenues. Liquidity and risk appetite more important than fundamentals. And the debt ratio is still 60%: far above estimates of  safe debt, including by the IMF itself.Ё0]PPPmѓ ŸЈPublic Debt and Fiscal SpaceЁ ŸЈpFiscal policy has not been serving growth and development. First price stabilization, now debt stabilization Burden fell on investment; from 8-10% to 4-5% of GDP Large infrastructure gaps, reducing potential growth Interest payments almost twice the share of investment Public debt distorting income distribution: regressive taxation, concentrated debt holdings ЁqPqѓ ŸЈHow to Generate Fiscal Space?Ё Ÿ ш BWIs: fiscal space is what is left after servicing debt. Raise efficiency and revenues, attract grants, borrow more Debt relief is not an option unless  granted by creditors. IMF aversion to restructuring. Primacy of debt service Why then promote CACs? UN approach: sustain and service debt subject to MDGs. US Chapter 9: Primacy of social objectives over debtЁ uZtѓŸЈ&Debt Workouts: Options and ConstraintsЁ'' Ÿ  Domestic debt: Keynes solution Official debt: Evian approach  more promises. 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