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Asymmetries in the sustainability of public debt in the EU: The use of swaps

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  • Giannini, Bianca
  • Oldani, Chiara

Abstract

The aim of this paper is to analyze the effects of structural asymmetries related to the use of interest rate swaps within the European Union (EU) on the sustainability of public debt. The fiscal consolidation required to comply with the European budgetary rules increased for some countries the incentives to use debt related instruments (i.e., financialization of debt). Indeed, in the period 2006–2020, 17 EU countries used interest rate swaps to hedge their public debt. Dynamic panel data analysis results show that a 1 percent increase in the ratio of interest rate swaps to debt, ceteris paribus, leads to an improvement of the primary surplus over GDP by 0.49, thus ameliorating the sustainability of public debt. However, financial contracts imply additional risks that can ultimately impact in the medium term on public debt, which are not currently assessed by the standard Debt Sustainability Analysis (DSA). The aim of the paper is to fill this gap and discuss the main policy implications of the use of swap. In the post pandemic era, the political economy of debt reduction should properly consider the financial risks related to swaps.

Suggested Citation

  • Giannini, Bianca & Oldani, Chiara, 2022. "Asymmetries in the sustainability of public debt in the EU: The use of swaps," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    • Handle: RePEc:eee:joecas:v:26:y:2022:i:c:s1703494922000093
    DOI: 10.1016/j.jeca.2022.e00248
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    More about this item

    Keywords

    European Union; Financialization; Public debt; Swap;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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