Public debt levels in the CEEC

The paper warns that while the future EU Member States’ public debt is relatively limited today, its medium-term stabilisation is not always guaranteed.

With a view to adopting the euro, the fulfilment of the Maastricht criteria is now a major concern for the CEEC. Their public debt is relatively limited today, but its medium-term stabilisation is not always guaranteed.

A public debt criterion met in 2002…

The ratio of public debt to GDP is lower than the threshold fixed by the Treaty of Maastricht (60%) in all countries. The average debt level (32%) is much lower than in the peripheral countries of the eurozone a few years before the adoption of the euro (83% of GDP in Ireland, 64% in Spain, 64% in Portugal in 1995). Handicapped by high level of indebtedness at the beginning of transition, Hungary and Bulgaria managed to bring its evolution under control thanks to the maintenance of a significant primary surplus (balance excluding interest payment) since 1997 (5.4% of GDP in Bulgaria in 2001). The debt/GDP ratio decreased by 21 and 47 percentage points respectively between 1996 and 2001. The fall of the dollar, the main currency of its external debt in 2002, allowed Bulgaria to fall below the threshold of 60%.

… but a recent trend upwards

In most countries, the level of indebtedness progressed between 2001 and 2002. This was the case in Poland, in Hungary, in the Czech Republic (a regular rise since 1998), in Slovenia and Romania. The recent improvement in Slovakia should not conceal a rise of 15 points from 1998 to 2000. In the context of a strong fall in interest rates and a favorable evolution in the exchange rate, the rise of the debt to GDP ratio is the result of the degradation of the primary balances. In Hungary, the recapitalisation of state-owned companies and big wage increases in the public sector resulted in a debt increase of more than 5 GDP points in 2002. The primary balance also deteriorated in the Czech Republic in 2002, following the overcost due to the floods. Privatisation revenues enabled the debt to be contained in 2002, but it should progress strongly in 2003.

Measured risks in the medium term…

The debt denominated in foreign currency (called “external” in column 2) represents on average 50% of the total public debt (col.1). The exposure is significant in Hungary (33% of GDP in 2001) and especially in Bulgaria where virtually all the debt is denominated in foreign currency (more than half in dollars and one third in euros). With 63% of the external public debt subject to a floating interest rate, Bulgaria remains very dependent on sound rating by the rating agencies. Like Bulgaria, Lithuania, Slovenia and Poland have undertaken to reduce the dollar share of their foreign debt. In Lithuania and Poland, the risk is also minimised by an increased use of fixed rate loans and the lengthening of maturity (exceeding 2 and half years on average for internal public debt in Poland). The convergence of the long term rates with the levels of the eurozone is about to be completed (see REA N°43), which allows for a gradual reduction in the interest burden.

on condition that some countries undertake tax reform

The debt to GDP ratio should stabilise in the medium term, provided that budget deficits are contained. The projections carried out for Slovakia and the Czech Republic appear to show that the debt of these two countries could reach 60% of GDP by 2010 in the absence of large-scale reform of welfare expenditure. Whilst the project of the Dzurinda government may stabilise public finances in Slovakia, the Czech government has again postponed pension reform. In Poland, the IMF foresees a debt level at 58% of GDP in 2006, but a constitution-based mechanism , which fixes a threshold for public expenditure as soon as the debt exceeds 50% of GDP, minimises the risk of spending getting out of control. In Hungary, the debts of public bodies and health related expenditure will have to be co ntrolled.

For more analyses, see the

enlargement website of DREE.