RRZ: Slovakia Exposed to Higher Default Risk Due to Aging Population

Bratislava, 23 June (TASR) - The risk of sovereign default in Slovakia increased from 0.3 percent in the baseline year 2010 to 10.9 percent in 2025, exceeding the 5-percent threshold generally regarded as safe, and if current policies remain unchanged, the probability is expected to surpass 50 percent by 2040, the Council for Budget Responsibility (RRZ) warned in a study published on Tuesday.

Under a baseline scenario of unchanged policies, Slovakia's general government debt is projected to reach 108.6 percent of GDP by 2040. While the country does not currently face an immediate threat of sovereign default, its long-term vulnerability is increasing, according to the analysts.

The RRZ said public debt should not be assessed solely on the basis of its current level. Equally important is the state's future capacity to service its debt. This capacity is influenced primarily by demographic trends, economic growth, public expenditure and the government's ability to generate primary budget surpluses.

Population ageing is increasing pressure on public spending, particularly on pensions and other age-related expenditure. At the same time, it is reducing the scope for future budget surpluses. As a result, an ageing economy faces a higher risk of default at the same level of debt than a country with a more favourable demographic structure.

According to the RRZ, the risk of sovereign default does not rise in a linear manner. The closer a country comes to its fiscal limit, the greater the impact of any further increase in debt or expenditure. The combination of high debt and worsening demographic trends is therefore more dangerous than either factor on its own.

Default does not necessarily mean a formal failure to repay debt. It may also include debt restructuring, coupon reductions, principal write-downs or participation in a financial assistance programme such as those provided by the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) or the International Monetary Fund (IMF).

While participation in a rescue mechanism may not legally constitute a default, it indicates a loss of access to market financing on acceptable terms.