Debt Management, Fiscal Vulnerability and Fiscal Solvency: The Mexican Recent Experience (Very preliminary – Do not quote)

This paper analyzes debt management from a solvency point of view. The approach is particularly useful since we can measure the effect of debt management policies, such as debt composition and maturity, in probabilities of insolvency. Thus, by introducing debt management with new financial solvency criteria we can evaluate the effectiveness of that management under the Mexican experience. In particular we evaluate the effect of having different debt composition and the impact of longer maturities in such probabilities. We observe that the probability of reaching a threshold that is unsustainable has decreased from the 1980s and during the 1990s and the 2000s. In fact, the simulations suggest that the policy reaction function of the primary surplus to public debt is highly responsive, given the historical effort of debt reduction at the end of the 1980s. Then, we run a simulation over the sub sample period 1996-2005, in which we incorporate explicitly the external debt reduction policy with different rates of reduction of the proportion of external debt to total ratio. We find that on average, reducing the proportion of external debt to total in 3 percent every period reduces the probability of a crisis in 0.03. Finally, we incorporate an index of domestic maturity in the estimated model and introduce an explicit policy of maturity increases. If the average maturity of the domestic debt increases from zero to two percent every quarter, on average the probability of reaching the specified threshold in 0.02. Similarly, increasing the rate of the term structure of debt from zero to four percent reduces the probability in 0.037, increasing it at 6 percent per quarter decreases the probability i