Political risks: the “red shift” in debt sustainability analysis
Political stability and economic policy uncertainty can be key determinants of sovereign debt dynamics, and we show how they can be incorporated in debt sustainability analysis. We distinguish between short-term ambiguity and long-term uncertainty about political risk factors, and using a combina...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
AIFIRM
2020-04-01
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| Series: | Risk Management Magazine |
| Subjects: | |
| Online Access: | https://www.aifirm.it/wp-content/uploads/2021/04/RMM-2020-01-Excerpt-3.pdf |
| Summary: | Political stability and economic policy uncertainty can be key determinants of sovereign debt dynamics, and we show how they
can be incorporated in debt sustainability analysis.
We distinguish between short-term ambiguity and long-term uncertainty about political risk factors, and using a combination of narrative scenarios and calibrated probabilistic scenarios we obtain a comprehensive heatmap of high-risk debt dynamics. We use Italy as an interesting case study and demonstrate a “red shift” in the assessment of vulnerabilities when accounting for political risks. Ignoring these risks can lead to excessive optimism and wrong decisions |
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| ISSN: | 2612-3665 2724-2153 |