ESTIMATING FISCAL SUSTAINABILITY HYPOTHESIS AND ANALYZING RELATIONSHIP BETWEEN DEBT AND FDI INFLOWS

The aim of paper is to analyze fiscal sustainability and to test fiscal sustainability hypothesis. It should be mentioned that fiscal sustainability is considered one of the key indication for central governments. Firstly, individual fiscal discipline is pivotal proxy for the establishment of common monetary policy. Second, debt accumulation associated with consequent budget deficit may yield to increase in long term interest rates that can cause negative affects to financial markets. Third, member states will be able to keep criteria's of aforementioned Maastricht convergence criteria (Eduard, Tomash, and Stefan, 2011). To test the hypothesis some selected Euro zone countries, including United Kingdom and Azerbaijan were selected. In empirical part of the article author examines fiscal sustainability hypothesis of selected countries. Countries selected in Eurozone are mainly those that possessed vulnerabilities during European debt crises. As such, sustainability hypothesis is examined by applying Panel Unit Root tests for debt-toGDP ratio from 1995 to 2016 period. In the methodology, theoretical background of the ratio is explained. The empirical test evidence using root test demonstrated us incapability of rejection hypothesis in levels. Further paper also analyses the relationship between government debt-to-GDP ratio and Foreign Direct Investments using correlation analysis for countries. FDI is one of the main economic indicator that supports the growth of economies of the countries via contribution to the transfer of new technologies and resources, to the realization of reforms and setting up of financial institutions and to stabilize fiscal sustainable in different ways. Author starts article starts briefly description about crises that triggered fiscal sustainability issues. The discussion also includes analyses of relationship between FDI and total debt of selected countries. Further, in the analyses of study author discusses theoretical part, which then followed by several literatures reviews on growth and government debt relations. Article provides data and methodology aiming to of the aim of the researched article. Finally, in summary for of the basis of research materials author provides findings and summarizes concluding remarks.


INTRODUCTION AND PROBLEM STATEMENT
The recent European debt crises in 2010-2011 years yield to reveal the vulnerabilities of fiscal sustainability of some Euro Zone countries. As such, the fiscal sustainability has been considered one of the central macroeconomic tasks of the European Union countries. European Union's Maastricht Treaty indicates that the member states pledged to limit their deficit spending 3 percent of GDP at most, and should keep debt levels at 60 percent of GDP. The Maastricht criteria was mainly motivated by Germany to ensure that the qualifying members had a strong fiscal and monetary background. (Pilbeam, 2006). Moreover, after the crises countries began to improve fiscal sustainability of the economies through various actions, including promoting foreign investors to invest. In primarily to what attract foreign поддерживает рост экономики стран за счет вклада в передачу новых технологий и ресурсов, реализацию реформ и создание финансовых институтов, а также стабилизацию фискальной устойчивости различными способами.
investments to country and expand size of economies. These are also achieved through foreign direct investments (FDI).
During 2010 and 2011 years, euro zone nations faced their own type of fiscal distress because of heavy borrowing practices (Greece, Portugal and Italy), property bubbles (Ireland and Spain). The accessibility of easy credit led to an overreliance on external credit sources to fund domestic debt (Sandoval et al., 2011). Identifying the trigger of the crisis is a difficult task, but a relevant starting point would be that of the case of Greece. Greece was living beyond its means since even before it became part of the Euro zone in 2001. After adopting the euro, the Greek government borrowed heavily and public spending soared. Combined with a failure to implement financial reforms, this left Greece badly exposed when the global financial crisis struck. It became evident that Greece was in need of financial aid. Thus, in May 2010 Greece was provided with € 110bn of bailout loans by the IMF and in July 2011 an additional € 109bn of bailout loans were earmarked to Greece. However, this still seems to be insufficient for the country to get out of the crisis; by the middle of November 2011, Greece's debt amounted to more than € 340bn (BBC News, 2011). Furthermore, the euro zone's single currency makes it easy to shift money across borders from risky economies to safer ones.
Because financial institutions in most European countries holding Greek bonds, they were susceptible to downgrade risks by rating agencies. (New York Times, 2011) To give an example, Moody's downgraded two large French banks, Credit Agricole and Societe Generale, due to the financial institutions' exposure to Greek bonds and debts of some other risky members of the Eurozone. (CNN, 2011) Secondly, the risk of contagion can be observed through increasing borrowing costs. For example, the crisis within the Eurozone caused by Greece, led to significantly higher borrowing costs for Italy, peaking at almost 8 percent in November 2011. (Reu ters, 2011). Even though Greece marked the onset of the cris is, se veral other countries seemed to suffer from sustainability of debt. We can notice that Debt over GDP significantly increased, especially in the case of Greece and Italy (Figure 1).
Despite the fact that the EU countries had responsibilities to main ta in the obligation s within the Maastricht Treaty, i. e . k e e p gov e r n me n t de bt stable and pledge deficit levels, during the 2000-2010 years la s t de c a d e p u bl ic de bt of Greece, Italy, Portugal mainly have increased significantly. The sa me n ega tiv e tren d in debt/GDP ratio can be said about Ireland and Portugal, which are above the average EU level of 80.1% in 2010 (World Bank, 2018). As per the figure 1, Azerbaijan debt has been more stable compared to economies with sovereign debt issues. During 2010-2011 years, most EU c ou ntrie s GDP growth ra te wa s als o s u ffe red, however after then they restored position. Ireland made a significant improvement. However, Italy and Greece Ita ly are still fac in g ne ga tiv e ec on omic performance (World Bank, 20017).
Analysis of researches: theoretical background The major indicator for empirical testing is the notion of fiscal sustainability in terms of Debt-to-GDP Ratio. The theoretical motive for this macroeconomic indicator starts with government budget constraint. According to previous theoretical papers on fiscal sustainability government budget can be expressed as following (Wilcox, 1989): (1).   They have the null hypothesis of unit roots, (all-time series in panel have a unit root). According to test results in E views, the p-value of those tested data is more than 0.05 and the absolute t-statistics is less than the critical value. Therefore, we cannot reject the null hypothesis at 5% level. The test results indicate that null of none of the cases can be rejected 2 . According to panel unit root test results, we can see that sample Debt-to-GDP ratio for all the selected countries are non-stationary in levels. Table  3 summarize test results.
Thus, standard results in panel unit root provided nonstationary debt to GDP ratios. As we discussed in methodology part, by examining in first difference level in software we are able to reject the null hypothesis, where transformation makes data to be stationary and thus enable us to reject the null in favor of stationarity in debtto-GDP ratio. More precisely, in the first different level, tested results indicate the rejection of null hypothesis. We can briefly conclude here that, sustainability of government debt in PVBC context can be explained partly in our panel unit root tests. Notwithstanding the fact that obtained results are not inspiring, however, the notion is to test the sustainability of debt-to-GDP ratios which is some piece of the fiscal sustainability.
Moreover, in this part of the paper, we provide trend of foreign direct investment in Azerbaijan and debt-to-GDP ratio over 22 years. The average FDI over these years were amounted 2.9 billion dollar. Whilst, average FDI during 2003-2016 years was 4.1 billion dollar. Significant amount of FDI increase about 69% took place during 2014 year.
In addition, we provide, cross correlation between FDI and DEBT to GDP ratio amongst the countries estimated in our model. The pattern of relationship with FDI inflow and debt as a percentage of GDP are negative in Azerbaijan, Italy, Belgium and United Kingdom. Whilst, it has been negative in Greece and Ireland.
The correlation analyses reveal that in some countries, there is positive relationship with FDI, however, mostly the negative correlation is existed. For example, correlation coefficients are -0.07 and -0.34 for Azerbaijan and Italy respectively. Aimed with this correlation, however, there is not strong correlation between government debt and FDI inflows.

CONCLUDING REMARKS
The article briefly analyzed the triggering issues of European debt crises. The underlying reason was vulnerabilities of fiscal sustainability. Although, the Euro zone sovereign debt crisis has been caused by several factors, including loss of confidence, contagion effects, structural issues, one of the triggering reason was rising government debts. Taking into account this, in empirical part, I used standard unit root test to detect the fiscal sustainability for selected Euro zone countries, UK including Azerbaijan. Test resulted yield to non-stationary debt-to-GDP ratio in levels, which implicitly indicates nonstationary of debt to GDP ratio. Needless to mention that, in our first difference results we obtained stationary results for all countries, including Azerbaijan. Yet, having in mind some theoretical approach the stationary is not only sufficient condition to analyze for fiscal sustainability, and for further expansion of our research other factors that should be taken into consideration and analyzed.