Sovereign Debt Composition in Advanced Economies: A Historical Perspective

Abstract

We examine how the composition of public debt, broken down by currency, maturity, holder profile and marketability, has responded to major debt accumulation and consolidation episodes during 1900-2011. Covering thirteen advanced economies, we focus on debt structure shifts that occurred around the two World Wars and global economic downturns, and the subsequent debt consolidations. Notwithstanding data gaps, we are able to recover some broad common patterns. Episodes of large debt accumulation-essentially, large increases in debt supply-were typically absorbed by increases in short-term, foreign currency-denominated, and banking-systemheld debt. However, this pattern did not hold during the debt build-ups starting in the 1980s and 1990s, which were compositionally skewed toward long-term local-currency debt. We attribute this change to higher structural demand for sovereign paper, linked to capital account liberalization in advanced economies, the emergence of a large contractual saving sector, and innovative sovereign debt products. With regard to debt consolidations, we find support for the financial repression-cum-inflation channel for post World War II debt reductions. However, the scope for a repeat of this strategy appears limited unless financial liberalization and globalization were materially rolled back or the current globally agreed monetary policy regime built around price stability abandoned. Neither are significant favorable structural demand shifts, as witnessed in the 1980s and 1990s, likely.

Quantifying Risks to Sovereign Market Access: Methods and Challenges

“…The maturity at issuance is a result of an intertemporal trade-off between the lower costs of holding short-term debt against the likelihood of a debt roll-over crisis, owing to an unexpected surge in repayment risks (Broner et al, 2013). The cost-risk trade-off usually translates into issuance across the maturity spectrum (Abbas, et al, 2014). Therefore, excessive reliance on short-term debt may expose the government to volatile and potentially increasing debt costs if financial market conditions tighten quickly.…”

Non‐residents’ Holdings, Market Volatility and Public Debt Sustainability. An Analysis with Data for Italy

“…Regardless of the cause behind the NRH decrease during the EA debt crisis, it might have affected the sustainability of public debt for the countries that experienced it. Indeed, the sustainability of the debt stock depends also on its features (Abbas et al, ). Non‐residents’ holdings may matter because they reflect its external dimension (Arslanalp and Tsuda, ; Gros and Alcidi, ).…”

“…Regardless of the reason for the observed decrease in NRH, it may have endangered the sustainability of public debt. Among other things, the risks for debt sustainability depend also on its features (Abbas et al, ). Typical directions of analysis are the short‐ vs long‐term maturity of the debt stock, the fixed vs variable rate and the domestic vs external dimension (see, among others, Alfaro and Kanczuk, ).…”

Inflation and Public Debt Reversals in Advanced Economies

“…The effect of an inflation shock on public debt could be smaller if the higher inflation is associated with a shortening of debt maturity, as suggested byAbbas et al (2014).©International Monetary Fund. Not for Redistribution…”