Tracking Global Demand for Advanced Economy Sovereign Debt
IMF Working Papers, December 3, 2012
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- Tracking Global Demand for Advanced Economy Sovereign Debt
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Bibliographic details
- Authors: Serkan Arslanalp, Takahiro Tsuda
- Published: December 3, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475596403.001
Summary
- Recent events demonstrate sovereigns, like banks, can be subject to runs, underscoring the importance of the investor base for sovereign liabilities.
- The paper proposes a methodology for compiling internationally comparable estimates of investor holdings of sovereign debt.
- Based on this methodology, the paper introduces a dataset for 24 major advanced economies covering US$42 trillion of sovereign debt holdings on a quarterly basis over 2004-11.
- The paper proposes a framework—sovereign funding shock scenarios (FSS)—for forward-looking analysis of sovereign vulnerability to sudden investor outflows, to be used alongside standard debt sustainability analyses (DSA).
- Two risk indices are introduced to assess vulnerability to shifts in investor behavior: investor base risk index (IRI) and foreign investor position index (FIPI).
Dataset and methodology
- Coverage: 24 major advanced economies.
- Scope: Tracks US$42 trillion of sovereign debt holdings.
- Frequency and period: Quarterly data over 2004-11.
- Purpose: Produce internationally comparable estimates of investor holdings of sovereign debt to inform analysis of funding risk and investor behavior.
Key findings
- Despite high-profile outflows from euro periphery countries, most sovereign borrowers increased reliance on foreign investors.
- Increased reliance on foreign investors may have helped reduce borrowing costs but can imply higher refinancing risks going forward.
- Advanced economy banks’ exposure to their own government debt began to increase across the board after the global financial crisis, strengthening sovereign-bank linkages.
Risks, indices, and analytical tools
- Sovereign funding shock scenarios (FSS): A proposed framework to conduct forward-looking analysis of sovereigns’ vulnerability to sudden investor outflows; intended for use in conjunction with DSAs.
- Investor base risk index (IRI): Introduced to assess sovereign vulnerability related to the investor base.
- Foreign investor position index (FIPI): Introduced to assess sovereign vulnerability related to foreign investor holdings.
Implications and policy relevance
- Monitoring investor base composition and foreign investor positions is critical for assessing sovereign refinancing and rollover risks.
- Analyses of sovereign vulnerability should incorporate forward-looking funding shock scenarios (FSS) and the proposed risk indices (IRI and FIPI) alongside traditional DSA frameworks.
Content in this bundle
- PDP-Working Paper