FINANCIAL STABILITY INDICATORS AND PUBLIC DEBT DEVELOPMENTS
Athanasios O. Tagkalakis
Bank of Greece
This paper investigates the inter-linkages between financial stability and fiscal policy. It analyzes the effect of selected financial stability indicators on the probability of future debt deterioration, controlling for several macroeconomic variables. We find significant evidence that a fragile banking system can put at risk public finances. Weak bank profitability, low asset quality and a weak capital base increase the fragility of the banking system, thus, raising the probability of future fiscal troubles.
Keywords: Bank profitability; capital adequacy; asset quality; fiscal policy.
JEL classification: E44, E58, G21, G28, E61, E62, H61, H62, E32.
Acknowledgements: I would like to thank Hadi Salehi Esfahani and two anonymous reviewers for their useful comments and suggestions. I would also like to thank Anindya Banerjee, Hamid Beladi, Martin Cihak, Paul Evans, Davide Furceri, Heather Gibson, Iftekhar Hasan, Maria Kasselaki, and Ike Mathur. The views of the paper are my own and do not necessarily reflect those of the Bank of Greece. All remaining errors are mine.
Economic Analysis and Research Department
Bank of Greece,
21 El. Venizelos Av. 10250 Athens, Greece