Spanish Public Debt Sustainability Analysis

This note develops an overarching debt sustainability analysis (DSA) framework, encompassing three of its main dimensions: (i) a traditional (deterministic) sustainability exercise, based on a simple accounting application involving the debt accumulation equation; (ii) an assessment of the realism of the assumptions underlying the deterministic debt projections; and (iii) a stochastic exercise aimed at understanding the uncertainty associated with the deterministic path. This framework is applied to the Spanish case, constructing and dissecting the baseline debt path associated with the official macro and fiscal projections. While Spanish public debt appears largely sustainable along this baseline, its realization seems optimistic in the light of historical experience.