Vulnerability Indicators, A Factsheet

Progress in Strengthening the Architecture of the International Financial System , A Factsheet

Research at the IMF

Sovereign Debt Structure for Crisis Prevention

Prepared by the Research Department

Approved by Raghuram Rajan

July 2, 2004

This is a preliminary and exploratory discussion paper designed to stimulate debate on the issue of sovereign debt structures for crisis prevention. It is not a policy paper of the International Monetary Fund, and any positions taken should not be attributed to the Executive Board or management of the IMF. This paper should not be reported as representing the views of the IMF.

Use the free Adobe Acrobat Reader to view the full text of the 1.2 Mb pdf file.

Also see Overview section of January 2005 Occasional Paper version (157 kb pdf file)

I.   Overview and Main Conclusions
  A.   Two Views on the Status Quo
  B.   Debt Structures with Existing Instruments: Emerging vs. Advanced Countries
  C.   Ideas for Sovereigns from the Corporate Context: Explicit Seniority
  D.   Expanding the Set of Instruments: Real Indexation
  E.   Toward Better Sovereign Debt Structures: A Roadmap
II.   Facts on Existing Public Debt Structures
  A.   Public Debt in Emerging Markets Compared to Advanced Countries
  B.   Sovereign Versus Corporate Liability Structures
III.   Rendering Debt Structures Less Crisis-Prone with Existing Instruments
  A.   Problems With The Status Quo
  B.   Determinants of Government Debt Structure
  C.   Policy Implications
IV.   Explicit Seniority in Privately Held Sovereign Debt
  A.   The Economic Role of Seniority
  B.   Approaches and Obstacles in Implementing Explicit Seniority
  C.   Conclusions
V.   Expanding the Set of Instruments: Indexation to Real Variables
  A.   Benefits of Indexing to Real Variables
  B.   Real Variables Beyond the Control of the Country's Authorities
  C.   Real Variables Partially Within the Control of the Country's Authorities
  D.   Obstacles for Variables Partly Within the Control of the Government
  E.   Steps to Foster Acceptance
  F.   Real Indexation: Which Variables for Which Countries?
VI.   The Past and Future of Innovation in Sovereign Borrowing
  A.   Financial Innovation in Sovereign Borrowing: A Haphazard Process
  B.   Roadmaps for Future Innovation
VII.   Conclusions
Appendix: Results of a Survey
Text Boxes:
1.   Debt Structure and Hedging
2.   Creating Domestic Markets for Long-term Local-Currency Bonds: Country Experiences
3.   Developing International Markets for Bonds in Emerging Market Currencies
4.   Enforcing Contractual Seniority
5.   The Impact Effect of a Switch to First-In-Time Seniority on Borrowing Costs
6.   Proposals for Indexation to Real Variables
7.   Benefits of GDP Indexation for Emerging Markets and Advanced Countries
8.   Previous Examples of Indexation to Real Variables
Text Tables:
1.   External Sovereign Debt: Currency Composition, 1980-2003
2.   Structure of Domestically-issued Government Bonds at End-2001
3.   Structure of Total (Domestic and External) Central Government Debt
4.   Top Five Natural Disasters by Percent of GDP Lost
5.   Output Growth and Trading Partners Growth, 1970-2002
6.   Introduction of Inflation-indexed Securities by Sovereigns
Text Figures:
1.   Advanced and Emerging Market Countries: Public Debt Stocks and Debt Composition, 1992-2002
2.   Structure of External Public Debt: Bonds Versus Loans, 1980-2003
3.   Emerging Markets: Fixed versus Floating-Rate Sovereign Bond Issues, and Share of Floating Interest Rate Debt in the EMBIG, 1980-2003
4.   Structure of Internationally-Issued Debt: Maturity Composition
5.   Emerging Market Countries: Structure of Public Debt
6.   All Developing Countries: Public Sector Bonds and Loans Issued in International Markets, 1980-2002
7.   Recent Crises: Impact of the Exchange Rate Depreciation on the Ratio of Public Debt to GDP
8.   Share of Long-term Local-currency Bonds in Total Government Domestic Bonds (in 2001) and Inflation History
9.   Share of Long-term Local-currency Bonds in Total Domestically-issued Bonds (in 2001) and Financial Liberalization Index
10.   Institutional Quality and Domestically-Issued Long-Term Local-Currency Debt
11.   Interest Savings Over the Economic Cycle