Tracking Global Demand for Advanced Economy Sovereign Debt
International Monetary Fund, Dec 3, 2012 - Business & Economics - 62 pages
Recent events have shown that sovereigns, just like banks, can be subject to runs, highlighting the importance of the investor base for their liabilities. This paper proposes a methodology for compiling internationally comparable estimates of investor holdings of sovereign debt. Based on this methodology, it introduces a dataset for 24 major advanced economies that can be used to track US$42 trillion of sovereign debt holdings on a quarterly basis over 2004-11. While recent outflows from euro periphery countries have received wide attention, most sovereign borrowers have continued to increase reliance on foreign investors. This may have helped reduce borrowing costs, but it can imply higher refinancing risks going forward. Meanwhile, advanced economy banks’ exposure to their own government debt has begun to increase across the board after the global financial crisis, strengthening sovereign-bank linkages. In light of these risks, the paper proposes a framework—sovereign funding shock scenarios (FSS)—to conduct forward-looking analysis to assess sovereigns’ vulnerability to sudden investor outflows, which can be used along with standard debt sustainability analyses (DSA). It also introduces two risk indices—investor base risk index (IRI) and foreign investor position index (FIPI)—to assess sovereigns’ vulnerability to shifts in investor behavior.
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advanced economy sovereign area debt turmoil assets Australia base risk index Belgium Book value Book Book value Market calculations central bank holdings correlation country’s currency Czech Republic debt holdings debt securities Denmark domestic bank holdings Domestic central bank domestic investors domestic nonbanks economy sovereign debt euro area countries euro area debt euro area government Eurosystem exposure external debt external debt statistics face value Figure Finland ﬂows foreign central banks foreign exchange reserves foreign nonbanks foreign outﬂows foreign private investors Funding Shock Scenarios Germany government debt government securities Greece high-spread euro area holdings of foreign investor base risk Ireland Italy Japan Korea loans and SMP Locational Banking Statistics low-spread euro area Netherlands Non-Euro Area Norway offo reign central percent Portugal QEDS Quadrant refinancing risk reﬂecting risk score sector Slovenia sovereign bond Sovereign Funding Shock Switzerland Traditional reserve countries valuation adjustment value Book value value Market value Zealand