The paper was commissioned by the ECON Committee of the Economic Governance Support Unit Directorate-General for Internal Policies of the Union.

The approach to Debt Sustainability Assessments (DSAs) has substantially evolved after the global crisis. With the goal of improving risk detection, DSAs cover an increasing number of indicators, systematically look into implicit and contingent liabilities, and use statistical methods to quantify highly risky “tail events”. This paper focuses on three critical areas limiting the effectiveness of DSAs – liquidity risks, contagion risks and identification of debt limits. It makes a comparative assessment of current standard DSAs to identify best practices across institutions and makes recommendations for future improvements.

Readers of the paper might also be interested in Professor Corsetti’s 2015 EEA Schumpeter lecture, The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises.