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Optimal State Contingent Sovereign Debt Instruments
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Book Synopsis Optimal State Contingent Sovereign Debt Instruments by : Mr. Alejandro D Guerson
Download or read book Optimal State Contingent Sovereign Debt Instruments written by Mr. Alejandro D Guerson and published by International Monetary Fund. This book was released on 2021-09-10 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows that the optimal sovereign lending contract is state-contingent when a government can default. It provides a theoretical basis for the specification of optimal state-contingent debt instruments (SCDIs) in countries subject to large shocks that can be observed and verified by all parties involved, such as natural disasters or global pandemics. The result is obtained as the endogenous solution to a contracting problem under time-inconsistency when a government cannot credibly commit to honor debt service obligations in all possible states of nature. It is shown that rational investors optimally offer SCDIs that include additional financing when the default constraint is binding, keeping the debtor engaged in the contractual relationship and avoiding asset loss. The debtor benefits because the contract implies net-positive financing when facing a large shock, increasing concurrent welfare, while maintaining access to financing in the future for consumption smoothing at the same terms as with precommitment. SCDIs require maintaining debt at a low level compared to the precommitment case, and also a fiscal consolidation when triggered to contain the increase in debt. Extension of the time inconsistency problem to add the taxation of capital returns shows that the optimal physical capital investment is also state-contingent.
Book Synopsis Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt by : Mr. Francisco Roch
Download or read book Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt written by Mr. Francisco Roch and published by International Monetary Fund. This book was released on 2021-03-12 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.
Book Synopsis The Premia on State-Contingent Sovereign Debt Instruments by : Deniz Igan
Download or read book The Premia on State-Contingent Sovereign Debt Instruments written by Deniz Igan and published by International Monetary Fund. This book was released on 2021-12-03 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general f ramework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.
Book Synopsis The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings by : Charles Cohen
Download or read book The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings written by Charles Cohen and published by INTERNATIONAL MONETARY FUND. This book was released on 2020-11-19 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings. Any such restructurings will likely take place during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values, and potentially even relapses into default post-restructuring. State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.
Author :International Monetary Fund. Asia and Pacific Dept Publisher :International Monetary Fund ISBN 13 :1498346812 Total Pages :50 pages Book Rating :4.4/5 (983 download)
Book Synopsis State-Contingent Debt Instruments for Sovereigns by : International Monetary Fund. Asia and Pacific Dept
Download or read book State-Contingent Debt Instruments for Sovereigns written by International Monetary Fund. Asia and Pacific Dept and published by International Monetary Fund. This book was released on 2017-05-22 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Background. The case for sovereign state-contingent debt instruments (SCDIs) as a countercyclical and risk-sharing tool has been around for some time and remains appealing; but take-up has been limited. Earlier staff work had advocated the use of growth-indexed bonds in emerging markets and contingent financial instruments in low-income countries. In light of recent renewed interest among academics, policymakers, and market participants—staff has analyzed the conceptual and practical issues SCDIs raise with a view to accelerate the development of self-sustaining markets in these instruments. The analysis has benefited from broad consultations with both private market participants and policymakers. The economic case for SCDIs. By linking debt service to a measure of the sovereign’s capacity to pay, SCDIs can increase fiscal space, and thus allow greater policy flexibility in bad times. They can also broaden the sovereign’s investor base, open opportunities for risk diversification for investors, and enhance the resilience of the international financial system. Should SCDI issuance rise to account for a large share of public debt, it could also significantly reduce the incidence and cost of sovereign debt crises. Some potential complications require mitigation: a high novelty and liquidity premium demanded by investors in the early stage of market development; adverse selection and moral hazard risks; undesirable pricing effects on conventional debt; pro-cyclical investor demand; migration of excessive risk to the private sector; and adverse political economy incentives.
Book Synopsis Optimal Time-Consistent Government Debt Maturity by :
Download or read book Optimal Time-Consistent Government Debt Maturity written by and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Optimal Government Debt Maturity by : Davide Debortoli
Download or read book Optimal Government Debt Maturity written by Davide Debortoli and published by . This book was released on 2014 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.
Book Synopsis Indebtedness, Interests, and Incentives by : Andrin Bögli
Download or read book Indebtedness, Interests, and Incentives written by Andrin Bögli and published by . This book was released on 2017 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies state-contingent debt as an alternative refinancing instrument for advanced economies. In times of high sovereign indebtedness, increasing yields impose eminent debt roll-over risks. We analyze the welfare implications of two state-contingent debt instruments: puttable and GDP-to-debt-indexed bonds, both temporary in nature and intended to improve deleveraging feasibility. In return for an insurance premium, puttable bonds offer protection against sovereign default, thereby internalizing the implicit risk-sharing mechanism inherited by the ECB's "Outright Monetary Transactions" program. Similar to GDP-linked debt, bonds indexed to a country's GDP-to-debt ratio, henceforth "GDR bonds," allow for consumption smoothing via state-contingent interest payments. In contrast to GDP-linked debt, GDR bonds permit competitive risk-return profiles even in the face of pessimistic growth outlooks. We find that, in the presence of default costs, state-contingent bonds allow for substantial welfare improvements relative to standard sovereign debt. For risk-averse consumers, the counter-cyclical fiscal leeway created by GDR bonds dominates the interest savings provided by puttable bonds. We verify this preference order by calibrating our model to the five Eurozone countries most heavily affected by the debt crisis: Portugal, Ireland, Italy, Greece, and Spain. We discuss implied deleveraging incentives, limited commitment, and practical implementation issues for GDR bonds.
Author :International Monetary Fund. Asia and Pacific Dept Publisher :International Monetary Fund ISBN 13 :1498346804 Total Pages :56 pages Book Rating :4.4/5 (983 download)
Book Synopsis State-Contingent Debt Instruments for Sovereigns - Annexes by : International Monetary Fund. Asia and Pacific Dept
Download or read book State-Contingent Debt Instruments for Sovereigns - Annexes written by International Monetary Fund. Asia and Pacific Dept and published by International Monetary Fund. This book was released on 2017-05-22 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: These annexes accompany the IMF Policy Paper State Contingent Debt Instruments for Sovereigns
Book Synopsis A Primer on Managing Sovereign Debt-Portfolio Risks by : Thordur Jonasson
Download or read book A Primer on Managing Sovereign Debt-Portfolio Risks written by Thordur Jonasson and published by International Monetary Fund. This book was released on 2018-04-06 with total page 133 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides an overview of sovereign debt portfolio risks and discusses various liability management operations (LMOs) and instruments used by public debt managers to mitigate these risks. Debt management strategies analyzed in the context of helping reach debt portfolio targets and attain desired portfolio structures. Also, the paper outlines how LMOs could be integrated into a debt management strategy and serve as policy tools to reduce potential debt portfolio vulnerabilities. Further, the paper presents operational issues faced by debt managers, including the need to develop a risk management framework, interactions of debt management with fiscal policy, monetary policy, and financial stability, as well as efficient government bond markets.
Book Synopsis Sovereign Debt Restructurings 1950-2010 by : Mr.Udaibir S. Das
Download or read book Sovereign Debt Restructurings 1950-2010 written by Mr.Udaibir S. Das and published by International Monetary Fund. This book was released on 2012-08-01 with total page 128 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a comprehensive survey of pertinent issues on sovereign debt restructurings, based on a newly constructed database. This is the first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, creditor participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses.
Book Synopsis Guidelines for Public Debt Management -- Amended by : International Monetary Fund
Download or read book Guidelines for Public Debt Management -- Amended written by International Monetary Fund and published by International Monetary Fund. This book was released on 2003-09-12 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: NULL
Book Synopsis External Debt Statistics by : International Monetary Fund
Download or read book External Debt Statistics written by International Monetary Fund and published by International Monetary Fund. This book was released on 2003-06-25 with total page 327 pages. Available in PDF, EPUB and Kindle. Book excerpt: This Guide provides clear, up-to-date guidance on the concepts, definitions, and classifications of the gross external debt of the public and private sectors, and on the sources, compilation techniques, and analytical uses of these data. The Guide supersedes the previous international guidance on external debt statistics available in External Debt: Definition, Statistical Coverage, and Methodology (known as the Gray Book), 1988. The Guides conceptual framework derives from the System of National Accounts 1993 and the fifth edition of the IMFs Balance of Payments Manual(1993). Preparation of the Guide was undertaken by an Inter-Agency Task Force on Finance Statistics, chaired by the IMF and involving representatives from the BIS, the Commonwealth Secretariat, the European Central Bank, Eurostat, the OECD, the Paris Club Secretariat, UNCTAD, and the World Bank.
Book Synopsis Global Waves of Debt by : M. Ayhan Kose
Download or read book Global Waves of Debt written by M. Ayhan Kose and published by World Bank Publications. This book was released on 2021-03-03 with total page 403 pages. Available in PDF, EPUB and Kindle. Book excerpt: The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.
Book Synopsis Issuing International Sovereign Bonds by : Mr.Mauro Mecagni
Download or read book Issuing International Sovereign Bonds written by Mr.Mauro Mecagni and published by International Monetary Fund. This book was released on 2014-06-04 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This African Department Paper examines the rise in international sovereign bonds issued by African frontier economies and recommends policies for potential first-time issuers.
Book Synopsis Rethinking Sovereign Debt by : Odette Lienau
Download or read book Rethinking Sovereign Debt written by Odette Lienau and published by Harvard University Press. This book was released on 2014-02-18 with total page 342 pages. Available in PDF, EPUB and Kindle. Book excerpt: Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, a country that fails to honor its obligations damages its reputation. Yet should today's South Africa be responsible for apartheid-era debt? Is it reasonable to tether postwar Iraq with Saddam Hussein's excesses? Rethinking Sovereign Debt is a probing analysis of how sovereign debt continuity--the rule that nations should repay loans even after a major regime change, or else expect consequences--became dominant. Odette Lienau contends that the practice is not essential for functioning capital markets, and demonstrates its reliance on absolutist ideas that have come under fire over the last century. Lienau traces debt continuity from World War I to the present, emphasizing the role of government officials, the World Bank, and private markets in shaping our existing framework. Challenging previous accounts, she argues that Soviet Russia's repudiation of Tsarist debt and Great Britain's 1923 arbitration with Costa Rica hint at the feasibility of selective debt cancellation. Rethinking Sovereign Debt calls on scholars and policymakers to recognize political choice and historical precedent in sovereign debt and reputation, in order to move beyond an impasse when a government is overthrown.
Author :International Monetary Fund. Research Dept. Publisher :International Monetary Fund ISBN 13 :1513585789 Total Pages :24 pages Book Rating :4.5/5 (135 download)
Book Synopsis IMF Research Perspectives by : International Monetary Fund. Research Dept.
Download or read book IMF Research Perspectives written by International Monetary Fund. Research Dept. and published by International Monetary Fund. This book was released on 2021-08-05 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: IMF Research Perspectives: Spring/Summer 2021
