In a general way the market value of

In a general way, the market value of government debt is not available and it is common practice to use the par value of debt. However, as pointed out by Butkiewicz (1983), par value is a poor proxy for market value, especially when interest rates are changing rapidly. Hence, the market value is a result of MV=[(1+Mat·c)/(1+Mat·r)]·P, where: Mat is the term to maturity, c is the coupon rate, r is the yield, P is the par value. The third indicator takes into account the fiscal insurance and it is related with the persistence of debt. Based on the market value of government debt and the primary deficit (w), a measure of debt management is a result ofwhere and . The only difference between the indicators is that is normalized by the degree of persistence in the primary deficit. The greater Ψ the worse the performance of debt management and negative values are indicative of complete market outcomes. The persistence of public debt can be reduced by adjusting the primary deficit, a fact that hampers the measurement of the performance of debt management. The ras pathway of persistence must come from a change in the returns of securities, an effect that can be captured by the relative persistence of the market value of debt to primary deficit. The persistence of the indicator takes on, for example, outstanding reduction effects due to increases in the primary surplus. Taking into account the concept of fiscal insurance that the debt management can offset the impact of the primary deficit on the market value of debt, thus minimizing debt fluctuations involves exploiting a negative covariance between the primary deficit to GDP (w*) and the rates of return on debt (R*MV*). Hence,where MV* is the market value of government debt to GDP, and σ denotes the standard deviation. With the aim of building the above-mentioned indicators for the Brazilian economy in a time series perspective, the variables listed below are used. All data is monthly, accumulated in the last 12 months, deflated by Extended National Consumer Price Index (IPCA – official price index), beginning in January 2007 and ending in September 2012 (69 observations). The reason for this period is that the Anbima Market Index which is crucial for building the fiscal indicators does not consider the treasury bonds indexed to the exchange rate and the share of the federal government debt indexed to the exchange rate became negligible from 2006. Hence, According to Giavazzi and Missale (2004) an increase in the sustainability of the public finance is a result of the combination of a reduction in coupon interest rate and the stabilization/reduction of the public debt. As can be seen in Fig. 1, the coupon interest rate fell in the beginning of the period, but after the subprime crisis it increased and began to oscillate at a higher level. Regarding the market value of debt, the trajectory shows that although there was considerable fluctuation in the period there was not an unsustainable path. The graphs on the persistence of the federal government debt denote that from a perspective of short-term (3, 6, and 9 months), there was in a greater part of the period, a performance near zero (see Fig. 2). This observation suggests that a shock on the market value of debt was quickly absorbed. It is important to note that during the period after the subprime crisis (August 2008–September 2009) the relative persistence of debt was negative which, in turn, indicates a strong sustainability of the government budget in the period. Another period that deserves attention is from the last quarter of 2010 to the last quarter of 2011 due to the fact that the market value of debt has been more persistent than the primary result. The increase in the market value of debt can be a result of change in the expectations of government\'s fiscal discipline implying a higher risk premium. There was a loosening of fiscal and monetary policies in the years of 2009 and 2010 due to an unfavorable external environment. Furthermore, both inflation rate and interest rate (Selic) increased in the period and thus also caused a deterioration in the public debt management.