
We develop a measure of maximum sustainable government debt for advanced economies. How much investors are willing to lend to a country's government depends on how high a primary surplus they expect that government to generate, how fast they expect the country to grow, how volatile they expect that growth to be, and how much debt they expect the government will be able to raise in the future for the purpose of servicing the debt it seeks to raise today. This last observation points to the presence of a borrowing multiplier, which raises a country's borrowing well above what it would be, absent the ability to service maturing debt out of new debt's proceeds. Present debt is sustainable when implied future debt remains bounded. A country's probability of default displays a marked asymmetry around that country's maximum sustainable debt (MSD): it increases slowly below and rapidly above. We calibrate our measure for 23 OECD countries: Korea has the highest MSD at 281% of GDP and Greece the lowest at 89%. The probabilities of default at MSD are very low, from Norway's 0.27% to Korea's 0.81%. Most countries' actual debt-to-GDP ratios in 2010 are below MSD; some countries are above; these are generally the countries that have received some form of financial support in the wake of the financial crisis.
Deficit, 2000 General Economics, Econometrics and Finance, 330, 10003 Department of Finance, JEL: H - Public Economics/H.H6 - National Budget, and Debt/H.H6.H63 - Debt • Debt Management • Sovereign Debt, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, B- ECONOMIE ET FINANCE, 330 Economics
Deficit, 2000 General Economics, Econometrics and Finance, 330, 10003 Department of Finance, JEL: H - Public Economics/H.H6 - National Budget, and Debt/H.H6.H63 - Debt • Debt Management • Sovereign Debt, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, B- ECONOMIE ET FINANCE, 330 Economics
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