Credit Risk and Substainable Debt: A Model and Estimationsof Why the Euro is Stable in the Long-Run

Sustainable debt has become a key issue in rating of private as well as sovereign debtors. The problem of how to estimate sustainable debt has also been at the center of debate over theAsian 1997-1998 financial crisis. If the external value of the currency depends on the external debt of a country it is necessary to estimate the creditworthiness of the country. This paper studies credit risk and sustainable debt in the context of an intertemporal model. For a dynamic growth model with an additional equation for the evolution of debt we demonstrateof how to compute sustainable debt and creditworthiness. The model is estimated by employing time series data for the core countries of Euroland. The computations show that Euroland has large external assets. Using time series methods the sustainability of external debt (assets) is estimated for those core countries of Euroland. Those estimations show thatthe Euro will be a stable currency in the long run.