Debt Sustainability Issues in Central and Eastern European Countries

This study investigates debt sustainability in ten Central and East European countries over the period 1998–2015. We calculate the stabilized debt ratios, turning points, and debt limits using estimates of a fiscal reaction function, capturing the response of the government to changes in their debt ratio. We find that in 2017, the public debt exceeded the stabilized debt ratio values in all the countries under investigation. However, the public debt still has a stable dynamic and is far from the level at which governments’ fiscal reaction reverses and becomes negative. After this level, public debt will have an unstable trajectory and will become unsustainable. Moreover, governments are still far from the debt thresholds of “fiscal fatigue”, a situation in which the effort to stabilize debt (in terms of adjustment in fiscal policy) exceeds the government’s ability or willingness to do so.