Deck 18: Sovereign Debt and Default

Question 1

If the primary budget is balanced each year,then

A) no debt/GDP ratio is sustainable, regardless of g and r
B) any debt/GDP ratio is sustainable, regardless of g and r
C) a positive debt/GDP ratio tends to infinity if r < g
D) a positive debt/GDP ratio eventually becomes negative if r > g
E) a positive debt/GDP ratio is sustainable if g = r

Answer 1

a positive debt/GDP ratio is sustainable if g = r

Question 2

'Junk' Bonds are defined as bonds

A) of an issuer in default
B) of an issuer with a credit rating below AAA (S&P rating)
C) of an issuer without a credit rating
D) of an issuer with a rating below BBB- (S&P rating)
E) of an issuer with a rating below CCC- (S&P rating)

Answer 2

of an issuer with a rating below BBB- (S&P rating)

Question 3

An economy has potential output of 100,actual output of 90 and tax revenue of 50.The current government deficit is zero,what is the structural deficit if the elasticity of revenue with respect to out is 0.5 whilst the elasticity of spending with respect to output is -0.25?

A) 0
B) -1
C) -2
D) -3
E) -4

Answer 3

-4

Question 4

A structural budget deficit is

A) The budget deficit adjusted for business cycle effects
B) The budget deficit excluding interest payments
C) The budget deficit that is sustainable in the long run
D) A budget deficit that cannot be eradicated
E) A budget deficit that occurs after a cut in taxes

Question 5

If annual GDP growth is .10,the interest rate is .05,there is no price inflation,and the government wants to keep national debt at 60% of GDP,then each year the government must run a

A) primary deficit equal to 3% of national income
B) primary deficit equal to 2% of national income
C) primary deficit equal to 1% of national income
D) primary surplus equal to 2% of national income
E) primary surplus equal to 3% of national income

Question 6

Inflation can reduce the burden of debt for a sovereign borrower because

A) High inflation reduces interest payments on existing debt
B) High inflation makes issuing new debt cheaper
C) High inflation raises the nominal value of tax revenues and GDP without raising the value of existing debt
D) High inflation causes foreign currency debt to fall in value in local currency terms
E) High inflation reduces the nominal value of existing debt.

Question 7

If annual GDP growth is 2%,the interest rate is 5%,there is no price inflation,and the government wants to keep national debt equal to GDP,then each year the government must run a

A) primary budget deficit equal to 3% of national income
B) primary budget deficit equal to 2% of national income
C) primary budget surplus equal to 1% of national income
D) primary budget surplus equal to 2% of national income
E) primary budget surplus equal to 3% of national income

Question 8

Most serial sovereign defaulters (countries that have defaulted more than 5 times since 1800) are in

A) Asia
B) Africa
C) Europe
D) Latin America
E) North America

Question 9

Which of the following is not a potential cost faced by a defaulting sovereign nation

A) Loss of reputation in international capital markets
B) Inability to borrow in international capital markets for some time
C) Losses to domestic holders of your debt
D) Losses to foreign holder of your debt
E) Inability of private sector borrowers to access credit internationally

Question 10

The Intertemporal Budget Constraint means

A) The Government budget must be in balance in the long run
B) The primary budget deficit should be zero
C) Government spending must be equal to government revenue in each period
D) The stock of debt today must equal the present value of future government surpluses
E) The stock of debt today must equal the present value of future government primary surpluses

Question 11

A credit spread is

A) The cost of borrowing
B) The increase in the cost of borrowing caused by the perceived risk of default
C) The increase in the cost of borrowing during a credit crunch
D) The difference between the cost of borrowing for a developed countries and a developing one
E) The difference in credit ratings between two countries.

Question 12

Foreign lenders are often reluctant to make loans to an emerging market country that are denominated in the country's own currency because

A) of the high risk of default
B) emerging markets suffer from debt intolerance
C) the currency might appreciate before the loan is repaid
D) the banking sector in emerging markets is often underdeveloped
E) the country might print money to repay the debt

Question 13

An economy has an output gap of -2%,government spending of 50% of GDP and a deficit of 4% of GDP,what is the structural deficit if the elasticity of revenue with respect to out is 0.75 whilst the elasticity of spending with respect to output is -0.25?

A) 0
B) 1
C) 2
D) 3
E) 4

Question 14

In a sovereign debt restructuring,a 'haircut' is

A) The amount of debt in default
B) The value of the debt after restructuring
C) The reduction in the value of the debt as a result of restructuring
D) The interest rate paid on debt in default
E) The length of time it takes for a restructuring to occur

Question 15

If annual GDP growth is .10,the interest rate is .05,the annual primary deficit is .04,and there is no price inflation,then the sustainable debt/GDP ratio is

A) .80
B) .90
C) 1.11
D) 2.80
E) 10

Question 16

Government borrowing tends to ________ in recessions and _______ in booms ?

A) Decrease, increase
B) Increase, decrease
C) Remain the same, remain the same
D) Increase, increase
E) Decrease, decrease

Question 17

Which of the following is not a contingent government liability

A) Future pension payments promised to the current workforce
B) The future decommissioning cost of state owned nuclear power plants
C) Health care spending promised to an aging population
D) Government debt that has to be paid off in future
E) The economic costs of climate change that will be faced by the government

Question 18

Which of the following countries had the highest gross government debt to GDP ratio in 2011?

A) Greece
B) Iceland
C) Spain
D) Japan
E) United States

Question 19

Original Sin for a developing country borrower refers to the tendency

A) For lenders to require debt to be short term or denominated in foreign currency
B) For these borrowers to default more often
C) For foreign lenders to suddenly stop lending
D) These borrowers to default at surprisingly low levels of debt
E) For lenders to require debt to be long term

Question 20

Over the last 10 years

A) The government debt of advanced countries has fallen as share of GDP whilst that of emerging and developing countries has risen
B) The government debt of advanced countries has fallen as share of GDP as has that of emerging and developing countries
C) The government debt of advanced countries has risen as share of GDP whilst that of emerging and developing countries has fallen
D) The government debt of advanced countries has risen as share of GDP as has that of emerging and developing countries
E) The government debt of advanced countries has stayed unchanged as share of GDP as has that of emerging and developing countries

Question 21

Which of the following is not true of the HIPC programme

A) It is organized by the IMF and World Bank
B) It offers debt relief to qualifying nations
C) It is focused on highly indebted poor countries
D) It has been offered to more than 20 countries
E) It can be offered to any country

Question 22

A 'Sudden Stop' is defined as

A) A sudden halt in economic growth
B) An unexpected default
C) A sudden withdrawal of funding by foreign creditors
D) A quick restructuring of government debt
E) A downgrade by a credit rating agency

Question 23

The tendency for developing countries to be forced into default at surprisingly low levels of debt is called

A) The Debt Relief Laffer Curve
B) Original Sin
C) Serial Default
D) Debt Intolerance
E) Sovereign Default

Question 24

The debt relief Laffer curve implies that

A) Expected debt repayments always rise with the level of debt
B) Expected debt repayments always fall with the level of debt
C) Expected debt repayments first rise and then fall with the level of debt
D) Expected debt repayments first fall and then rise with the level of debt
E) Expected debt repayments and the level of debt are unrelated

Question 25

Debt forgiveness may benefit the lender because

A) They may receive a larger payment on remaining debt as a result for faster economic growth of the borrower
B) They will gain a reputation for forgiving debt
C) They in turn may be forgiven their debt in future
D) They can charge a higher interest rate on future borrowing
E) The IMF or World Bank will reimburse them