Press Release: IMF Consultations on Managing Sovereign Risk and Public Debt Consider New Directions for Debt Management in Light of the Crisis and Principles for Portfolio Stress Testing

June 23, 2011

Press Release No. 11/250
June 23, 2011

On June 22-23, the International Monetary Fund (IMF) held its annual consultations on managing public debt Legacy of the Crisis: Long Term Implications for Managing Sovereign Risk, Government Balance Sheets, and Debt Management”. The event held in Seoul, Republic of Korea, was co-hosted by the Ministry of Strategy and Finance of the Republic of Korea.

Senior officials from ministries of finance, central banks, and debt offices from 25 countries, along with select private sector representatives, discussed managing sovereign risk, government balance sheets, and debt management issues arising from the crisis. Representatives from the Asian Development Bank, European Central Bank, European Bank for Reconstruction and Development, and the World Bank also attended. Discussions took place against the backdrop of the ongoing challenges in the context of high levels of public debt and deficits in the advanced economies, investors’ concerns about heightened sovereign risk, and uncertain economic and financial market conditions.

At the opening of the Forum, the Vice Minister of Strategy and Finance for Korea, Sung-Kull Yoo, said, “Given the declining growth potential and aging population, we need to further develop government bond markets to secure fiscal resources for the future.” Jan Brockmeijer, Deputy Director of the Monetary and Capital Markets Department of the IMF, said, “The legacy of high public debt and elevated sovereign risk stemming from the crisis carries far reaching implications and challenges for debt managers, as well as for debt markets and investors. Policy makers need to acknowledge these and should mitigate vulnerabilities by building more robust and resilient sovereign balance sheets.”

Delegates reviewed debt management policy and operational issues in both advanced and emerging economies. They discussed key lessons from the euro area for other sovereign issuers, focusing on the policy implications for sovereign funding and debt management strategies, as well as issues related to contingent liabilities and off-balance sheet risks that may understate the extent of sovereign vulnerabilities. Participants also noted that absolutely safe sovereign debts no longer exist and that credit analysis is now as important as interest rate analysis for funding and debt strategies given investors’ evolving approach to sovereign risk assessment. Regarding emerging markets, participants exchanged views on strategies to mitigate currency and rollover risks in the context of the recent surge in capital flows, and the role of local currency bond markets in managing funding stress.

Delegates concluded that the crisis was changing the debt management function, including the design of funding and debt management strategies. In this context, the delegates agreed that the need for improved communication with key stakeholders, as well as disclosure of debt portfolios risks on a consistent and comparable basis, had gone up. The Stockholm Principles discussed in the last round of consultations had addressed some of these issues. Delegates welcomed multilateral initiatives to improve debt sustainability analysis, risk assessment of sovereign balance sheets, and strengthening of associated data gaps.

There was broad agreement among participants that the global financial crisis has also highlighted the need for debt managers and fiscal policy makers to revisit their approach to risk management to encompass a wider set of risk factors, including near-term liquidity risks, and exposure to contingent liabilities, especially those arising from the financial sector. “Stress testing provides a flexible and tractable approach where forward-looking scenarios could be used to assess the sovereign debt portfolio exposures to an array of risks and different time horizons,” Udaibir S. Das, Assistant Director in the Monetary and Capital Market Department of the IMF, said. In this context, participants shared experiences on methodological approaches to debt portfolio stress testing and emphasized the good principles and practices that should serve as a guide for stress testing frameworks of government debt portfolios. A set of draft principles (“Seoul Principles’) was discussed in this regard and work will continue to develop and finalize the principles in collaboration with debt managers.

In a special address, Choongsoo Kim, the Governor of the Bank of Korea, said: “Heightened sovereign risk and mounting debt burden, if unaddressed for long, will have lasting effects on growth and financial stability.” In another address, Takumi Shibata, Deputy President & COO, Nomura Holdings, stressed that sovereign borrowers need to protect themselves through fiscal soundness, prudent government balance sheet management, robust local bond markets, and active communication with investors.

In his closing remarks, Jae-Seek Park, Director General of Treasury Bureau of the Finance Ministry of Korea, said, “As we are still facing many challenges including the uncertainty in the euro zone periphery and increasing inflation risks, it is very critical to further enhance cooperation among countries and to put continuous efforts in formulating workable policies based on our discussion.”

The next IMF consultations on public debt and sovereign risk in 2012 will take place in Brazil and will be hosted jointly with the Ministry of Finance of Brazil.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100