Public debt indicates the amount of outstanding debt instruments that are issued by the government anytime during

the past but not yet repaid. (Seater, 2008) Incurring public debt is a regular phenomenon in managing fiscal and the monetary policy of an economy leading to governments borrowing money from local and international institutions to cover the public deficit. (Kumhof and Tanner, 2004) Mostly the lenders to the government are the financial intermediaries of the country where Kumhof and Tanner, (2004) states that in developing countries, public debt holders are banks and pension funds who hold the surpluses of the economy. According to Alisena and Tabelleni, (1989) public debt serves 02 purposes even though it seems to indicate a negative reflection of the economy and one such purpose is redistributing the income over time across generations while serving as a mechanism to minimize the deadweight losses on taxation created through providing public goods and services for the well being of the public. However, Reinhart (2011) in his working paper has expressed his concern over surging public debt of many advanced economies which has surpassed the ratios prevailed during the World war 01 and great depression making it a decade of debt. In discussing the risk attached to surging public debts, The Economist, (2012) states that more public debt indicates that there would be more state inference in the economy to impose controls while there is anticipation about high tax burden into the future indicating negative impact to the economy as a whole. Also, The Economist, (2012) argues that having to roll over the public debt at regular intervals creates a popularity test for government which functions as a reality show where government needs to attract votes in favour and failing the test would result in financial crisis and significant economic losses as occurred in Greece in early 2010. Given the significance risk of surging public debts in advanced economies, IMF, (2011) has proposed suverign debt management system to raise required level of public debt while meeting cost targets and minimizing risk which will create efficient financial markets in the economy. In guidelines for efficient public debt management IMF (2011) emphasizes that the governments debt is the largest financial portfolio in the economy where failure in management of such portfolio could lead to severe financial crisis. Even though IMF (2011) highlights that poor management in public debt is not the sole reason for financial crisis, maturity structure, and interest rate and currency composition of the government's debt portfolio have significantly contributed towards past and present financial crisis.

With the high level of surging public debts the discussions about defaults are rising the insights from previous studies can be explained as follows. According to Reinhart and Rogoff, (2008) every country has made a default on external debt at least once in their emerging marker phase which requires external funding for development indicating that defaulting is common phenomenon in the financial markets. Reinhart and Rogoff, (2008) in their study, This Time is Different identify few possible causes for default of public debt and global cycles were identified as one major reason. Kaminsky, Reinhart and Vgh (2005) identified that the favorable conditions in the terms of trade of a country which is powered by high priced commodities will attract significant amount of public debt and will be left default once the commodity prices drop and market crashes. This was proven by Reinhart and Rogoff, (2008) by using figures from 1800 to 2000 pre-world war figures and post-world war figures where it was clearly identified that when world commodity prices are low, the default of public debt is high. Reinhart and Rogoff, (2008) also identifies inflation as another cause for the default of public debt where emerging market are bound to be affected by the inflationary conditions leading to defaults in public debt and they emphasize that no country including USA was able to exclude the inflationary impact on its public debt and default. Similar conclusion was made by Aghion and Bolton (1990) where they used the examples from left wing parties gaining the power of countries leading to high inflationary situation and ultimately resulting in de facto default. Additionally, Reinhart and Rogoff, (2008) states that exchange rate has been another significant factor that influences public default where they used figures from 1800 to 2006 to prove the situation. It was revealed that during the years with high annual currency depreciation, the public debt default percentage has been increasing proving the effect of causation. Earlier study by Dreher, Herz and Karb, (2006) also provides similar conclusion where it acknowledges that the currency crisis can create debt crisis in a county. Another factor identified by Reinhart and Rogoff, (2008) as a cause for public default is that the amount of varieties of crises where they name five types of crises external default, internal default, currency crashes, banking crises and inflation. In their study they prove that in 2002 Argentina suffered from all five crises at the same time which led Argentina to make a huge default on their public debt. Similar findings were made by Torre, Yeyati and Schmukler, (2002) about Argentina and their debt crisis.

References Reinhart and Rogoff, (2008) http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf http://www.nber.org/chapters/c6668.pdf (Seater, 2008) http://econlib.org/library/Enc/GovernmentDebtandDeficits.html (Kumhof and Tanner, 2004) http://www.stanford.edu/~kumhof/calvo2008.pdf Alisena and Tabelleni, (1989) http://www.jstor.org/pss/2298021 Reinhart (2011) http://www.nber.org/papers/w16827.pdf The Economist, (2012) http://www.economist.com/content/global_debt_clock IMF, (2011) http://www.imf.org/external/np/mae/pdebt/2000/eng/index.htm Aghion and Bolton (1990) http://books.google.lk/books?hl=en&lr=&id=9oMJyMkevkC&oi=fnd&pg=PA315&dq=public+debt+default+inflation&ots=9dxSNhZRbZ&sig=C Nb4wUpWNnmnyKTXlfZeDQhtRvc&redir_esc=y#v=onepage&q=public%20debt%20default% 20inflation&f=false Torre, Yeyati and Schmukler, (2002) http://www.econ.umn.edu/~tkehoe/classes/Schmukler.pdf Reinhart, Rogoff and Savastano (2003)