## State-Contingent Debt Instruments for Sovereigns

## Source details

**Canonical URL:** [State-Contingent Debt Instruments for Sovereigns](https://www.imf.org/en/publications/policy-papers/issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns)

## Other formats

- [Markdown version](/en/publications/policy-papers/issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns/index.md)
- [Structured JSON version](/en/publications/policy-papers/issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns/index.json)
- [Bundle manifest](/en/publications/policy-papers/issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns/bundle-manifest.json)

## Bibliographic details
- Published: May 22, 2017

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### 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.
- Staff 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.
- SCDIs can broaden the sovereign’s investor base.
- SCDIs can open opportunities for risk diversification for investors.
- SCDIs can 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.

### Potential complications and risks to mitigate
- 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.
- Adverse political economy incentives.

### Metadata and publication note
- Title: State-Contingent Debt Instruments for Sovereigns
- Date: May 22, 2017
- Subjects: Bonds, Financial instruments, Fiscal policy, Fiscal risk, Investment, Risk management, Sovereign debt

*State-Contingent Debt Instruments for Sovereigns (May 22, 2017)*

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## Content in this bundle

- **Policy Paper**
  - [Policy Paper (Markdown version)](/-/media/files/publications/pp/pp032317state-contingent-debt-instruments-for-sovereigns.pdf.md){rel="alternate" type="text/markdown"}
  - [Policy Paper (PDF)](/-/media/files/publications/pp/pp032317state-contingent-debt-instruments-for-sovereigns.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/policy-papers/issues/2017/05/19/pp032317state-contingent-debt-instruments-for-sovereigns_