The Correlation between the Risk of Default and Solvency of Member States of the Monetary Union

Abstract

The debt crisis in the European Monetary Union, emphasized the importance of keeping a responsible fiscal policy, especially in the context of issues of public debt sustainability and solvency of the member countries. Common rules for control of the public debt was introduced in the EU provide for mandatory measures for all Member States when their public debt exceeds the limit of 60% of GDP, as well as rules on the maximum amount of deficit percentage of GDP. Te intensity of the debt crisis is determined by the confidence of investors, which depends on economic fundamentals as well as assessing whether the government will consistently meet their obligations. Te aim of the research is to determine whether the ratio of debt to GDP positively correlated to movements in interest rates on government bonds and to determine the degree of their coherence. In a sample of 17 EMU member countries and time periods pre-crisis and crisis period, correlation and regression analysis indicate a causal connection between these indicators and their impact on the solvency of the country. Results show that in the event of a crisis in public debt due to the increase in interest rates on long-term government bonds, significantly increasing the share of public debt in GDP, which increases the risk of non-payment of debt and consequent insolvency of member states. Fiscal aspect of integration of BiH observed through the prism of fiscal criteria of the EU show a minimum deviation from the reference value, however, given that the movement of the public debt servicing is directly dependent on the degree of increase/decrease of GDP, exports and disposable income to service the debt, decisions on further borrowing must be associated with manufacturing projects or production projects that will contribute to further economic growth and competitiveness.