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The People's Republic of China (PRC) is the world's largest official creditor nation with its outstanding debt claims on the rest of the world totaling an estimated US$5.5 trillion in 2019 or more than 6% of global GDP. However, given Beijing’s very limited transparency in its disclosures when it comes to its external lending (and now its alleged culpability in the spread of the coronavirus) the accusation that the PRC has for years engaged in “debt-trap diplomacy” has come under renewed scrutiny. Specifically, the charge is that the Chinese government, which is the world's leading creditor lending via its multibillion dollar “Belt and Road Initiative” as well as various state-owned and controlled entities, lures developing countries, in particular, low-income countries, with easy money to fund often economically unviable projects. This is because China's ultimate goal is to get access to the borrowers' local markets and natural resources and indirectly controlling or outright seizing assets and resources, including extracting economic and political concessions when these countries fail to service their loans – which is often given at market or above-market interest rates and carry shorter maturities, thereby requiring regular refinancing. This paper reviews this claim and concludes that it seems exaggerated.

This chapter is devoted to fiscal policy theory and to how its evolution influenced the policy principles implemented from the end of the World War II to the present. It shows how the theoretical foundations evolved, from the Keynesian theory according to which public expenditure was conceived as an instrument to sustain aggregate demand and achieve full employment, to the present theoretical framework in which, following the intertemporal approach, it has been downgraded to an external shock. The public debt issue is examined with the aim of explaining why sound public finance represents a primary policy objective in the Eurozone.

Building upon the framework of the tradeoff model of capital structure and motivated by the equity market timing theory, we examine whether equity misvaluation is a source of adjustment “costs” that will affect a firm’s leverage adjustment speed toward target. We also investigate whether the quality of a firm’s long-term growth options will influence the decisions of managers to exploit the mispriced equity to converge to the optimum. Using a sample of listed Taiwanese firms during 1992–2014 and employing the market-to-book decomposition as developed by Rhodes-Kropf, Robinson, and Viswanathan (2005), we find that overleveraged and overvalued firms demonstrate faster adjustment speed than overleveraged but undervalued firms. Furthermore, controlling for the misvaluation status, high-growth firms converge to target faster than their low-growth counterparts. The effect of growth options on the relation between equity mispricing and adjustment speed does not mirror the effect of financing deficits. With the detailed financial information of the local companies across a rather long time series, this study provides incremental inputs to the literature of capital structure from the determinants of target leverage, the estimation of leverage adjustment speeds, to the identification of the sources of adjustment costs in an emerging market where institutional environment is strikingly different from the US.

We examine the maturity structure in private placements of debt and relate it to contracting, signaling, tax, and liquidity risk considerations for firms. We find that firms with higher tax rates issue private placements of debt with longer maturities, consistent with the tax hypothesis. However, our results do not support the contracting, signaling, and liquidity risk hypotheses. In addition, the results are confined to the smaller firms in the sample, firms without a public debt rating, and debt issues not pursuant to Rule 144A. The evidence is consistent with smaller firms issuing private placements of debt to avoid monopoly rent extraction from banks.

The Japanese economy experienced prosperity during the bubble economy and has suffered from a prolonged recession since the bubble economy collapsed. This paper examines how the interest-bearing debt burden, structural change, and instability of confidence affect dynamic systems. Moreover, it examines these factors in the Japanese economy by applying a recursive vector autoregression analysis. This paper emphasizes the interest-bearing debt burden, the economic structure resulting from the instability of confidence, and the instability of confidence resulting from debt burden play important roles in the instability of the economy. As a result, Japan’s economy was determined to be relatively stable from 1980 to 1996, but was unstable, thereafter.

Myopic going concern practice refers to the current audit going concern opinion that a firm is rewarded a favorable going concern opinion as long as it has the capability to satisfy its debt obligation in the following year. We show, via a structural agency problem we develop in the paper, that such a practice has a potential economic cost to the firm. We study Lucent Technologies Inc. in detail for its loss in economic value and also measure the magnitude of this impact with 500 companies. We find that Lucent should have lost its going concern status in 2002 as it had to sell off its assets to meet debt obligations and nearly 18% of the 500 firms suffer some degree of economic loss due to the agency problem.

The recent development of the European debt sovereign crisis showed that sovereign debt is not “risk free.” The traditional index bond management used during the last two decades such as the market-capitalization weighting scheme has been severely called into question. In order to overcome these drawbacks, alternative weighting schemes have recently prompted attention, both from academic researchers and from market practitioners. One of the key developments was the introduction of passive funds using economic fundamental indicators.

In this chapter, the authors introduced models with economic drivers with an aim of investigating whether the fundamental approaches outperformed the other models on risk-adjusted returns and on other terms.

The authors did this by constructing five portfolios composed of the Eurozone sovereigns bonds. The models are the Market-Capitalization RP, GDP model RP, Ratings RP model, Fundamental-Ranking RP, and Fundamental-Weighted RP models. These models were created exclusively for this chapter. Both Fundamental models are using a range of 10 country fundamentals. A variation from other studies is that this dissertation applied the risk parity concept which is an allocation technique that aims to equalize risk across different assets. This concept has been applied by assuming the credit default swap as proxy for sovereign credit risk. The models were run using the Generalized Reduced Gradient (GRG) method as the optimization model, together with the Lagrange Multipliers as techniques and the Karush–Kuhn–Tucker conditions. This led to the comparison of all the models mentioned above in terms of performance, risk-adjusted returns, concentration, and weighted average ratings.

By analyzing the whole period between 2006 and 2014, it was found that both the fundamental models gave very appealing results in terms of risk-adjusted returns. The best results were returned by the Fundamental-Ranking RP model followed by the Fundamental-Weighting RP model. However, better results for the mixed performance and risk-adjusted returns were achieved on a yearly basis and when sub-dividing the whole period in three equal periods. Moreover, the authors concluded that over the long term, the fundamental bond indexing triumphed over the other approaches by offering superior return and risk characteristics. Thus, one can use the fundamental indexation as an alternative to other traditional models.

This chapter examines the impact of sectoral indebtedness on GDP in Czechia, initially a low-indebted small open economy in which debt dynamics are becoming a major concern. The impact of household debt, non-financial corporation debt and public debt is analysed with the use of local projections based on instrumental variable estimations. The results show a more pronounced influence of household debt compared to non-financial corporation and government debt. Initially, increasing household debt stimulates short-run economic activity, but in the medium run, it limits household consumption and negatively affects output. This negative impact gradually turns into a positive effect in the long run. Non-financial corporation debt has a negative short- to medium-run impact but can have a small positive effect in the long run due to the prevalence of tradable industries. Public debt initially has a short-run negative impact, but then gradually becomes positive. Overall, the findings have implications for macroeconomic policies and the importance of monitoring financial stability.