sovereign risk, debt management and financial...
TRANSCRIPT
Sovereign Assets and Liabilities Management Division
Monetary and Capital Markets Department
Sovereign Risk, Debt Management and Financial
Stability
Udaibir S. Das
Tunis, March 30, 2010
2
Outline
Sovereign debt: A Glut?Sovereign risk: Needs to be redefined?Linkages with financial instability: Real?Debt management: Can it play a role?
Key takeaways: Sovereign risk is a key crisis legacyDebt managers have an important roleNeed an integrated framework for managing sovereign risk, debt, and financial stability
3
Evolution of the Glut
Public Debt-to-GDP ratio (in percent), Selected Countries, 1875–2008
4
Financial Crisis: Debt Build Up
Composition of Discretionary Fiscal Measures (G-20 Countries)
5
Sovereign Debt: A Glut?
Source: IMF Staff
6
Sovereign Debt: A Glut?
Source: Dealogic, IMF Staff
-
1
2
3
4
5
2005 2006 2007 2008 2009
Gross Issuance: Regional Distribution (USD tr)
United States Japan Eurozone Europe (non-EMU)
7
Impact on Sovereign Debt Profile
Source: Dealogic, IMF Staff. As of end-2009.
21.3
15.816.7
13.7
9.9
3
6
9
12
15
18
21
24
-
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Nu
mb
er
of
Ye
ars
USD
bn
Net Sovereign International Issuance in Emerging Markets
Issuance (lhs) Redemptions (lhs) Average Maturity (rhs)
8
Impact on Sovereign Debt Profile
Issuance load and techniques have changed risk exposure
Maturity structureCompositionInvestor base
9
Impact on Sovereign Debt Profile
Source: Dealogic, IMF Staff
6.4
8.39.0
14.8
-
3
6
9
12
15
18
21
24
2005 2006 2007 2008 2009
Gross Issuance: Average Maturity (Number of years)
USD EUR JPY GBP
10
Financial Stability: definition and linkages with sovereign risk
0.0 4.0 8.0 12.0 16.0 20.0 24.0 28.0 32.0
IrelandSwedenAustria
United KingdomPortugalGreece
BelgiumSpain
ItalyJapan
FranceUnited States
GermanyNetherlands
Share of Domestic Debt withRemaining Maturity up to 1 Year
Source: IMF Staff, BIS
Maturity structure of debt – Shorter maturities could lead to higher interest rates
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Impact on Sovereign Debt Profile
Rise in contingent liabilities (5 elements)
Guarantees may be calledAnnounced lending facilities may be usedLoans may not be repaidAssets may not retain their valueImplicit liabilities (quasi sovereign; SOEs; sub-national)
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Exiting will be more of an art than just economics
Unwinding while maintaining financial stability will be a key goal
Macroeconomic adjustments as well as asset liability management (ALM) operations
If an asset sale generates proceeds, an important fiscal policy question is how best to use them
Unwinding of asset facilities established to help balance sheets of financial institutions may have to be gradual
13
Sovereign Risk: Needs to be Redefined?
• “Classic” definition: Used by ratings agencies and multilateral institutions
• “Market perception driven” approach : Implied default probabilities
• “Alternative approaches”: (i) Balance Sheet Approach (BSA); (ii) Contingent Claims Analysis (CCA)
14
Sovereign Risk Needs a Renewed Focus
Re-definition of sovereign risk
More emphasis on BSA and off-balance sheet itemsShould reflect structural vulnerabilities in debt portfoliosRe-examine the measurement, monitoring and management of sovereign risk
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Towards a New Definition of Sovereign Risk
Some factorsInvestors’ perspectives are key
Liquidity risk of outstanding debt
Larger domestic investor base Refinancing risk for the issuer
Change in credit quality reflected in rating agencies’ actions
Caution with current market measures of risk
Legal and institutional conditions
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Towards a New Definition of Sovereign Risk
Source: IMF Staff
Reliance on foreign capital
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Towards a New Definition of Sovereign Risk
Source: IMF Staff, Bloomberg, DataStream. Swap spreads are quoted as 10-yr bond yields minus 10 yr swap rates.
Example of market measures of risk
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Towards a New Definition of Sovereign Risk
Contagion and risk aversion are two “exogenous” dimensions Debt managers have to cope with market conditions beyond their controlContagion a direct consequence of peer analysisOften transforms specific credit events into an asset class or a regional crisis
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Towards a New Definition of Sovereign Risk
Sovereign Risk: A Proposed Five Pillar Framework
1. Macroeconomic underpinnings of sovereign debt sustainability (DSA)
2. Sovereign balance sheet strength (RMA/Stress test) 3. Vulnerability of sovereign debt portfolios (MTDS)4. Contagion risk (CCA)5. Global risk aversion (market price of risk)
+Inter-linkages and overlap between five pillars
20
Financial Stability: Linkages with Sovereign Risk
Impacts financial stability through liability & asset side of financial sector balance sheet
Liability side: high risk and high interest rates Asset side: high risk and intermediaries’ holding of government bonds; overall asset quality Sovereign risk from high debt level or risky structure adversely affects investment Higher risk affects composition and structure of financial sector balance sheet
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Role of Debt Management
Macro Channels
Fiscal Channel: Lead to relatively high costs, possibly implying an unsustainable debt pathMonetary Channel: Impede monetary policy Exchange Rate Channel: Accentuate deleterious effects of exchange rate shocks
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Role of Debt Management
Financial ChannelHelp reduce government’s exposure to interest rate risk Align profile of debt and that of the investor base Institutional ChannelsReduce market volatility Improve signaling of government policiesInvestors who are risk takers and those who hold longer term instruments
23
A Sum Up
• High sovereign indebtedness a global reality
• Greater risk of negative spillovers • Structural aspect of international markets • Strong potential to impair financial
stability
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A Sum Up
• Where to focus?• Redefine measurement and management of
sovereign risk• Undertake integrated management of systemic
sovereign risks• Reassess overall balance sheet risk• Associate strategy for sovereign risk management as
part of national contingency framework• Reform the role and function of debt managers
• Fund staff: coming out with a study on financial stability linkages, sovereign risk heat map, and some principles for managing high public debt