Pension Privatization and Country Risk

Author/Editor:

Alfredo Cuevas ; Maria Gonzalez ; Arnoldo López-Marmolejo ; Davide Lombardo

Publication Date:

August 1, 2008

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper explores how privatizing a pension system can affect sovereign credit risk. For this purpose, it analyzes the importance that rating agencies give to implicit pension debt (IPD) in their assessments of sovereign creditworthiness. We find that rating agencies generally do not seem to give much weight to IPD, focusing instead on explicit public debt. However, by channeling pension contributions away from the government and creating a deficit of resources to cover the current pension liabilities during the reform's transition period, a pension privatization reform may transform IPD into explicit public debt, adversely affecting a sovereign's perceived creditworthiness, thus increasing its risk premium. In this light, accompanying pension reform with efforts to offset its transition costs through fiscal adjustment would help preserve a country's credit rating.

Series:

Working Paper No. 08/195

Subject:

Frequency:

Daily

English

Publication Date:

August 1, 2008

ISBN/ISSN:

9781451870534/1018-5941

Stock No:

WPIEA2008195

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

25

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