Sovereign Risk, Debt Management and Financial Stability

Transcription

1 Monetary and Capital Markets Department Sovereign Assets and Liabilities Management Division 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 legacy Debt managers have an important role Need an integrated framework for managing sovereign risk, debt, and financial stability 2

3 Evolution of the Glut Public Debt-to-GDP ratio (in percent), Selected Countries,

4 Financial Crisis: Debt Build Up Composition of Discretionary Fiscal Measures (G-20 Countries) 4

5 Sovereign Debt: A Glut? Source: IMF Staff 5

6 Sovereign Debt: A Glut? 5 4 Gross Issuance: Regional Distribution (USD tr) United States Japan Eurozone Europe (non-emu) Source: Dealogic, IMF Staff 6

7 Impact on Sovereign Debt Profile 120 Net Sovereign International Issuance in Emerging Markets Issuance (lhs) Redemptions (lhs) Average Maturity (rhs) 21 USD bn Number of Years Source: Dealogic, IMF Staff. As of end

8 Impact on Sovereign Debt Profile Issuance load and techniques have changed risk exposure Maturity structure Composition Investor base 8

9 Impact on Sovereign Debt Profile Gross Issuance: Average Maturity (Number of years) USD EUR JPY GBP Source: Dealogic, IMF Staff 9

10 Financial Stability: definition and linkages with sovereign risk Maturity structure of debt Shorter maturities could lead to higher interest rates Netherlands Germany United States France Japan Italy Spain Belgium Greece Portugal United Kingdom Austria Sweden Ireland Share of Domestic Debt with Remaining Maturity up to 1 Year Source: IMF Staff, BIS 10

11 Impact on Sovereign Debt Profile Rise in contingent liabilities (5 elements) Guarantees may be called Announced lending facilities may be used Loans may not be repaid Assets may not retain their value Implicit liabilities (quasi sovereign; SOEs; sub-national) 11

12 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 12

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) 13

14 Sovereign Risk Needs a Renewed Focus Re-definition of sovereign risk More emphasis on BSA and off-balance sheet items Should reflect structural vulnerabilities in debt portfolios Re-examine the measurement, monitoring and management of sovereign risk 14

15 Towards a New Definition of Sovereign Risk Some factors Investors 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 15

16 Towards a New Definition of Sovereign Risk Reliance on foreign capital Source: IMF Staff 16

17 Towards a New Definition of Sovereign Risk Example of market measures of risk Source: IMF Staff, Bloomberg, DataStream. Swap spreads are quoted as 10-yr bond yields minus 10 yr swap rates. 17

18 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 control Contagion a direct consequence of peer analysis Often transforms specific credit events into an asset class or a regional crisis 18

19 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 19

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 20

21 Role of Debt Management Macro Channels Fiscal Channel: Lead to relatively high costs, possibly implying an unsustainable debt path Monetary Channel: Impede monetary policy Exchange Rate Channel: Accentuate deleterious effects of exchange rate shocks 21

22 Role of Debt Management Financial Channel Help reduce government s exposure to interest rate risk Align profile of debt and that of the investor base Institutional Channels Reduce market volatility Improve signaling of government policies Investors who are risk takers and those who hold longer term instruments 22

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 23

24 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 24