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Debt Sustainability Analysis (DSA): An E-Learning Training Course
I.(i)Definitions
I.(ii)Issues
II.(i)Framework for MIC
II.(ii)Framework for LIC
III.HIPC Framework
IV.Critique
V.Alternative Approaches
VI.Conclusion

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Introduction

'Debt sustainability is one of the most used and abused concepts in recent discussions on preventing and resolving sovereign debt crises. [...It] is an art rather than a science, and involves a large number of alternative methodologies' (Sturzenegger and Zettelmeyer, 2006).

'Debt sustainability is a vexing issue. Its importance is immediately obvious but it escapes any easy definition. This situation is not unheard of in economics; [] while price stability and full employment can both be measured with a reasonable degree of precision, debt sustainability cannot even be measured' (Wyplosz, 2007).

A debt sustainability analysis (DSA) assesses how a country's current level of debt and prospective borrowing affect its present and future ability to meet debt service obligations. It is a consensus that a key factor for achieving external and public debt sustainability is macroeconomic stability. As we shall see in this module, there are different approaches to DSA, each one with its pros and cons. It is essential to distinguish between the different types of debtors (middle income countries, low income countries and HIPCs) and creditors (private/official), in order to analyze the specificities and challenges of each case.

The aim of this first module is to introduce the concept of debt sustainability, looking at different issues that arise from its definition and analysis. In Section I, we introduce a definition of debt sustainability and present the 'solvency' and 'liquidity' concepts. In Section II, the IMF classical approach to DSA is reviewed (i) regarding countries with market access and (ii) for low income countries (LICs) with no access to markets. Section III briefly introduces the HIPC Initiative. Section IV brings a critique of the classical approach - Wyplosz's 'Impossibility Principle'. Section V offers potential alternatives to the IMF classical framework. Section VI concludes.

 

 

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