Analysis of the financial fragility hypothesis applied to the public sector by means of structural equations

Abstract

This study analysedthe effects of public debt interest and charges throughon Financial Fragility Hypothesis(FFH),in relation to Brazilian states’ public debt. Structural equation modelling was used as the empirical procedure.The effects of the structural model’s constructs explained 90.2% of the Public Sector Financial Position.The proposed model showed significance and relevance of the formative indicators. The results show that financial fragility is caused by excessive current spending but is aggravated by interest and amortisation costs that exceed the Current Revenue/Current Expenditure balance. This evidence confirms the assumptions of the FFHwhen applied to the public sector.