IMF Forum Considers Principles of Managing Public Debt in the Context of Market Turbulence

Press Release 10/275
July 2, 2010

Debt managers and central bankers from 31 advanced and emerging market countries joined invited representatives of the private sector in Stockholm, on July 1-2, for the 10th Forum on “Policy and Operational Issues facing Public Debt Management: Managing Sovereign Balance Sheet Risks in Turbulent Times”. Representatives from the European Central Bank, European Bank for Reconstruction and Development, Financial Stability Board, and the World Bank also attended. Participants at the event, which was co-hosted by the International Monetary Fund (IMF) and the Swedish National Debt Office (SNDO), discussed approaches for managing sovereign risk and high levels of public debt during times of market turbulence. They urged a careful examination of the potential implications of ongoing financial sector regulatory reform on the functioning of repo and derivatives markets.

Discussions took place against the general backdrop of heightened sovereign risk and high market volatility, particularly in the euro area. Delegates acknowledged that a sharp repricing of sovereign credit had occurred and that it had started to have adverse spillovers on the financial system. As a result, financing conditions in sovereign debt markets have become more challenging. While appearing to have stabilized at present, confidence has not yet been fully restored. In this regard, delegates welcomed global efforts to proceed with fiscal consolidation strategies and with mechanisms to support countries facing financing difficulties.

At the opening of the Forum, the Minister of Finance for Sweden, Anders Borg, said “Sweden has gained substantial strength from fiscal strengthening in the past and we know that under current circumstances, the need to reduce the uncertainty about fiscal policy and to restore public finances is strong. We cannot postpone until tomorrow what we have to do today.”

“Over the last decade the IMF Debt Forum has emerged as a significant multilateral consultative event for debt managers, central bankers, and other government officials, as well as representatives of the private sector. It has evolved from focusing predominantly on emerging markets to also include advanced market economies, reflecting the importance that public debt, sovereign risk, and sovereign debt management have assumed,” said IMF Deputy Managing Director Murilo Portugal.

Changing perceptions of sovereign credit risk and its implications for debt management were the defining themes of the Forum. José Viñals, Financial Counselor, IMF, stressed that “the root of the problem—sovereign risk—must be addressed. This implies credible fiscal consolidation plans, better strategies for public debt management, continued financial stability, accompanied where necessary, with growth-enhancing structural reforms.” With that in mind, delegates discussed specific policy and operational issues that could foster confidence in debt strategies and debt management.

There was broad agreement among participants that there are certain principles that could be followed in turbulent times, placing stronger focus on portfolio, and broader risks and their proper disclosure and understanding. Effective debt management requires that objectives, rationale, methods of implementation, and outcomes be communicated in a clear and timely manner. Participants also expressed general support for enhancing communication among debt managers, central banks, and fiscal and financial regulatory authorities. A set of draft principles (“Stockholm Principles”) were discussed in this regard.

In a special address to the Forum devoted to Mexico’s policy response to the global crisis, Agustín Carstens, the Governor of the Central Bank of Mexico said: “Active policy response and being ahead of the market, and keeping the market participants informed, helped catalyze the market response we desired.”

In another address, Stefan Ingves, Governor of Riksbank, stressed that the current crisis had once again highlighted the importance of building and deepening domestic capital markets.

The Forum also covered the outlook for sovereign funding, market liquidity, and differentiation of sovereign risk. The private sector representatives provided important insights into how risk perceptions are changing, and the longer-term implications for the build-up of sovereign debt on financial markets.

In his closing remarks, Bo Lundgren, Director General of SNDO, said: “The necessity of fiscal consolidation should also be seen as a possibility to strengthen economies. Structural measures can be designed to improve growth potential by increasing productivity and labor supply.”

“We are extremely grateful to our host, the Swedish National Debt Office, for arranging this very successful event,” Mr. Portugal said. “We are looking forward to our next meeting in 2011 to take place in Seoul, hosted by the Ministry of Finance of Korea.”



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