Seminar on Preventing and Managing Debt
Crises to Promote Long Term Sustainability
Debt Structure and Vulnerabilities
Discussion by Tatiana Didier (World Bank)
November 9, 2011
Santiago, Chile
Debt Structure and Vulnerabilities
 Debt structure (e.g. currency and maturity composition) has important
implications for:
Not only the disruptions caused by crises
 But also for the frequency of crises through at least two “channels”:
• Increased vulnerability to shocks to ST rates and RER (rollover risks)
• Through investor’s confidence

 Debt structure can potentially be key to confidence crises (and possibly
consequent debt crises):
Short-term debt and rollover risks: worsening perceptions of a country’s (firm’s)
creditworthiness can quickly feed into higher interest costs (leading to vicious selffulfilling circles), or even into an abrupt stop to new funding
 Foreign-currency debt: if a decline in confidence is followed by outflows and a
consequent XR depreciation, it can suddenly render a country (firm) illiquid or even
insolvent

2
Debt Structure and Probabilities of Crises:
Investors’ confidence
 Sudden Stops (rater than debt crises per se) might be a good proxy for
investors’ confidence or attitude towards a particular country
 Does debt structure affect the probability of a sudden stop?

Even after controlling for fundamentals such as GDP growth, inflation, current
account and fiscal deficits, TOT shocks, and world interest rates?
 Do public and private sector debt have similar effects on the probability
of sudden stops?
3
Debt Structure and the Probability of Sudden Stops
Probability of a Sudden Stop based on Issuance Data
Sudden Stop Type:
Types of Bonds:
Percentage of FCU Bonds at Issuance
lagged
Average Maturity at Issuance
lagged
Amount Raised through Bonds
lagged
Constant
Observations
Number of cnum
Any
Domestic
Private
Sector
Domestic
Private
Sector
Foreign
Private
Sector
Foreign
Private
Sector
Foreign
Public
Sector
Foreign
Public
Sector
0.242
[0.251]
-0.0123
[0.0175]
0.295
[0.257]
-0.00880
[0.0179]
-1.108
[1.438]
0.395
[0.305]
-0.0145
[0.0295]
0.580
[0.464]
-0.0528
[0.0449]
1.459
[2.396]
2.271**
[0.937]
0.0178
[0.0353]
1.991**
[0.954]
0.00432
[0.0369]
6.262**
[3.151]
-1.518*** -1.534*** -1.716*** -1.809*** -3.668*** -3.462***
[0.183]
[0.187]
[0.343]
[0.525]
[0.975]
[0.981]
618
611
607
391
314
299
48
45
49
31
32
32
Source: Author's calculations based on Calderon and Kubota (2010). Standard errors are shown in brackets.***
p<0.01, ** p<0.05, * p<0.1
4
Debt Structure and the Probability of Sudden Stops
Probability of a Sudden Stop based on Outstanding Amounts
Sudden Stop Type:
Bond Types:
Percentage of FCU Bonds
lagged
Percentage of ST Bonds
lagged
Total Outstanding Bonds
lagged
Constant
Observations
Number of countries
Any
Private
Sector
Private
Sector
Public
Sector
Public
Sector
Private
Sector
2.090*
[1.208]
-0.889
[1.194]
2.133*
[1.205]
-0.950
[1.188]
-0.155
[0.565]
1.187**
[0.572]
0.248
[0.720]
1.027*
[0.571]
0.107
[0.722]
-0.995*
[0.511]
0.00484
[0.839]
0.516
[0.815]
Inflow-Driven
Private
Public
Sector
Sector
0.170
[0.869]
0.267
[0.837]
-0.621
[0.531]
1.756***
[0.642]
1.337*
[0.772]
Public
Sector
1.609**
[0.647]
1.194
[0.774]
-0.775
[0.559]
-3.295*** -3.191*** -1.962*** -1.461*** -2.155*** -1.834*** -2.624*** -2.220***
[1.108]
[1.149]
[0.310]
[0.363]
[0.451]
[0.517]
[0.405]
[0.451]
298
298
512
512
350
350
512
512
28
28
46
46
29
29
46
46
Source: Author's calculations based on Calderon and Kubota (2010). Standard errors are shown in brackets.*** p<0.01, **
p<0.05, * p<0.1
5
Public sector debt structure as perhaps a symptom
rather than a cause…
 Sovereign debt structure appears to be the relevant one for the frequency of
crises.
 Debt crises, although perhaps inefficient ex-post, are the only way to
discourage defaults given its high costs (Dooley 2000, Dooley and Verma 2001)

In this view, ST and FCU debt can be optimal:
• [creditors’ perspective] It reduces moral hazard on the part of policy
makers (Diamond and Rajan 2001; Chamon 2002; Jeanne 2000, 2004; Tirole, 2002)
• [lenders’ perspective] This debt is typically cheaper than the alternative
(Broner, Lorenzoni, and Schmukler 2010)

Crisis-prone debt structures can be viewed as symptoms rather than causes
of countries' inability to commit to good policies (i.e. lack of credibility in
policies), which in turn can be the result of weak domestic institutions.
6
Public sector debt structure as perhaps a symptom
rather than a cause…
 Among EMs, there has been well-known-improvements in macrofinancial frameworks since the 1990s crises.
 Has this been accompanied by an improved debt structure?


There has been pro-active debt management practices of fiscal authorities in
most notably LAC
This process was facilitated by a extremely benign external environment
(abundance of savings) for most of the 2000s
7
EMs vs. HICs over the past 20 years:
Sovereign Bonds in Foreign Markets
Average Maturity of Public Bonds in Foreign Markets at Issuance
1991-1999
2000-2008
12
11.2
9.8
10
9.5
9.4
9.4
8
8.5
8.4
8.4
8.0
7.8
7.5
8.1
7.7
7.6
7.1
Years
6.4
6
4.6
3.6
4
2
0
Africa (6)
Source: Didier and Schmukler (2011).
Central
Asia (1)
China
East Asia
Eastern
(6)
Europe (13)
G7 (7)
Latin
Other
South Asia
America & Advanced
(2)
Caribbean Countries
(12)
(17)
8
EMs vs. HICs over the past 20 years:
Sovereign Bonds in Foreign Markets
Ratio of Foreign Currency Bonds to Total Bonds at Issuance for the Public Sector
1991-1999
100%
2000-2008
100%100% 100%100% 100%100% 100%100%
98%
100%
100%100%
100%100%
70.0
% of Total Foreign Bond by The Public Sector
93%
90%
89%
90%
60.0
80%
75%
74%
50.0
70%
58%
60%
40.0
50%
30.0
40%
30%
20.0
20%
10.0
10%
2.1 1.9
1.7 1.0
2.7 2.0
4.3 7.3
3.0 2.2
43.6 65.3
4.4 3.7
2.0 1.0
16.2 13.5
1.0 1.2
0%
Africa (6) Central
Asia (1)
Source: Didier and Schmukler (2011).
China
East Asia Eastern
(6)
Europe
(13)
G7 (7)
Middle
Other
Latin
South
America East (1) Advanced Asia (2)
&
Countries
Caribbean
(16)
(12)
9
Sovereign Bonds in Local Markets across LAC
Average Maturity of Bonds by the Public Sector in Domestic Markets
2000-03
2004-07
2008-09
25
20.0
20.0
20
16.8
16.0
15.0
15
Years
12.8
11.6
10
5.6
5.4
5.5
5.5
4.8
5
4.1
3.0
2.0 2.1
2.1
2.7
1.2
9
37
0
Argentina
Source: Didier and Schmukler (2011).
697 2,407
1,147
Brazil
2
6
Chile
11
1,145 1,168 645
916 1,146 578
Colombia
Mexico
42
120
Peru
19
163
36
Uruguay
10
Sovereign FCU Bonds in Local Markets across LAC
Composition of Public Sector Bonds in Local Markets
Inflation-Linked
Local Currency
100%
13%
5%
10%
Foreign Currency
4%
11%
11%
90%
14%
12%
23%
70%
70%
75%
60%
87%
90%
89%
89%
40%
86%
88%
2000-03
100%
93%
97%
99%
2008-09
50%
2004-07
85%
2008-09
% of Total Outstanding Bonds
80%
100% 100%
72%
30%
20%
30%
25%
10%
15%
Argentina
Source: Didier and Schmukler (2011).
Brazil
Chile
Colombia
Mexico
2008-09
2004-07
2000-03
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
0%
Uruguay
11
Interest Rate Risks faced by Sovereigns in LAC
Source: Deutsche Bank (2011).
12
EMs vs. HICs over the past 20 years:
Private Sector Bonds in Foreign Markets
Average Maturity of Private Bonds at Issuance in Foreign Markets
1991-1999
2000-2008
12
10
9.8
9.1
8.5
8
8.1
7.7
7.3
6.7
Years
8.1
7.9
6.3
6.0 6.1
7.2
6.5
6.4
6
5.6
5.2
5.8
6.1
5.1
4.45
4
3.0
2
0
Africa (9) Central
Asia (1)
Source: Didier and Schmukler (2011).
China
East Asia Eastern
(7)
Europe
(9)
G7 (7)
India
LAC (20) Middle Oth. Adv. South
East (5) Countries Asia (2)
(22)
13
EMs vs. HICs over the past 20 years:
Private Sector Bonds in Foreign Markets
Ratio of Foreign Currency Bonds to Total Bonds at Issuance for the Private Sector
1991-1999
% of Total Foreign Bond by The Private Sector
100%
98%
100%100% 100%
100%99%
96%
2000-2008
100%100%
100%
97%
96% 96%
100%100%
450
93%
89%
90%
87%
400
84%
80%
350
67%
70%
300
58%
60%
250
50%
45%
200
40%
150
30%
100
20%
50
10%
3
3
1
11
12
18
23
28
3
5
236 382
9
26
18
51
1
6
41
81
2
1
0%
Africa (9) Central
Asia (1)
Source: Didier and Schmukler (2011).
China
East Asia Eastern
G7 (7)
(7)
Europe (9)
India
LAC (20)
Middle
Other
South
East (5) Advanced Asia (2)
Countries
(21)
14
Bond Markets Remain Small and Highly
Concentrated
Concentration in Foreign Private Bond Markets
Amount Raised by Top-5 Issues as % of Total Amount Raised in Foreign Markets
1991-1999
2000-2008
500
100%
93%
88%
% of Total Amount Raised Abroad
90%
88%
450
80%
400
76%
73%
72%
69%
70%
69%
350
64%
57%
60%
57%
300
49%
50%
48%
48%
40%
250
200
31%
30%
150
24%
20%
100
10%
50
6
13
21
22
35
35
8
18
250
453
13
47
45
16
50
113
0%
0
Africa (1)
Source: Didier and Schmukler (2011).
China
East Asia (6)
Eastern
Europe (4)
G7 (7)
India
Latin
Other
America & Advanced
Caribbean Countries
(4)
(18)
15
EMs vs. HICs over the past 10 years:
Private Sector Bonds in Domestic Markets
Average Maturity of Bonds at Issuance in Domestic Markets
Private Sector
2002-2004
2005-2007
14
13.1
12
10.8
10.6
9.8
10
9.1
9.1
8.3
Years
8
7.9
6.9
6.2
6
5.4
4.8
4.9
280
349
4.7
5.0
4.6
4
2
14
40
54
321
4,687 3,294
1,194 1,566
G7 (7)
India
183
130
146
211
1
12
0
Africa (1)
Source: Didier and Schmukler (2011).
China
East Asia (5)
LAC (5)
Oth. Adv,
Countries
(14)
South Asia
(1)
16
EMs vs. HICs over the past 10 years:
Private Sector Bonds in Domestic Markets
Currency Composition of Bonds at Issuance in Domestic Markets
Foreign Currency Bonds as % of Total Issued Bonds by the Private Sector
1991-1999
2000-2008
45%
40%
40%
% of Total Issued Bonds
35%
31%
30%
28%
25%
25%
25%
20%
17%
15%
15%
13%
10%
5%
0%
East Asia (5)
Source: Didier and Schmukler (2011).
G7 (6)
LAC (12)
Oth. Adv. Countries (12)
17
Debt Structure during the Global Financial Crises:
The Importance of Public Sector Debt
 Despite improvements over the past decade, the global financial crisis was a
reminder of the dangers of ST and FCU debt. As I started this discussion, debt
structure has important implications for the disruptions caused by crises.
GDP Collapse during the Global Crisis
Log of GDP per Capita
Private
Sector
Bonds
Public
Sector
Bonds
(1)
(2)
(3)
(4)
2.275***
(0.588)
1.420
(1.238)
0.838
(0.599)
3.271***
(1.048)
-2.121
(1.946)
8.450**
(3.517)
Financial Openness
Log(Foreign Assets and Liabilities/GDP)
Loan Dollarization
% of Total Loans
7.733**
(3.420)
Ratio of Short-Term Bonds
-0.497
6.284
(2.694)
(3.831)
Ratio of Foreign Currency Bonds
-0.150
10.07***
% of Total Bonds
(2.139)
(1.857)
Outstanding Amount of Bonds
-2.267
-6.979***
(1.882)
(1.351)
Observations
62
24
37
R-squared
0.183
0.141
0.536
Robust standard errors are shown in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
% of Total Bonds
Source: Author’s calculations based on Didier, Hevia, and Schmukler (2011).
61
0.205
Private
Sector
Bonds
(5)
Public
Sector
Bonds
(6)
1.003
(1.238)
1.104
(1.816)
0.217
(0.771)
0.765
(0.769)
0.0276
(3.104)
-2.682
(4.428)
-2.402
(1.963)
24
0.164
7.008
(4.156)
9.841***
(1.879)
-7.170***
(1.428)
37
0.555
18
Fiscal Policies in the Aftermath of Crises
Emerging Economies
 Didier, Hevia, and Schmukler (2011) argues that improved debt structure
was one of the factors behind EMs resilience to the global financial crisis


Debt structure did not amplifying the external shock this time around
It even allowed some space for counter-cyclical fiscal policies
Source: Didier, Hevia, and Schmukler (2011).
19
Sovereign Debt Structure and Pro-cyclicality of
Fiscal Policies
 While a debt structure tilted towards LT and LCU debt may allow for
counter-cyclical fiscal policies, the opposite also holds.
 The insipient development of LCU debt markets in LAC has been a
welcome feature in this aspect, nonetheless LAC/EM countries should
further develop counter-cyclical financial instruments.
 Sizeable fiscal interventions (thus increased debt levels), tight financing
conditions in global capital markets for an extended period of time, and
the uncertainty surrounding the exit from discretionary fiscal stimulus may
pose a threat to debt sustainability

Not only debt structure, but size also matters
20
Structural Change in Foreign Liabilities
 At the same time, the structure of foreign assets ad liabilities has changed:
LAC (along with other EMs) are not creditors in debt-type instruments
Latin America & Caribbean
Percent of GDP
20%
0%
Wealth Effect from Debt Holdings
(percentage points of GDP)
4
K-S p-value=0.000
-20%
3.5
3
2.5
-40%
2006
2004
2002
2000
1998
1996
1994
1992
1990
2
1.5
1
0.5
0
-0.2
0
0.2
2008-2009 Crisis (39)
Source: Didier, Hevia, and Schmukler (2011).
0.4
0.6
0.8
1
Asian-Russian Crisis (18)
21
In sum…
 Continuing to improve debt structure remains key in the road ahead
Reduce the likelihood of crises
 Reduce the damages once a crisis hit

 This is particularly important for the public sector as their debt structure
constrains countries’ policy options in dealing with shocks
Limits to the ability do conduct counter-cyclical fiscal policies
 Affects the scope for decreases in the debt burden through inflation

 As Reinhart and Rogoff put it on their book (This Time Is Different:
Eight Centuries of Financial Folly):
Although private debt certainly plays a role in many crises, government debt is far more
often the unifying problem across the wide range of financial crises.
 This seems to be the case for not only debt size but also debt structure

22
In sum…
 Perhaps, now that (at least some) EM countries have (relative to their own
past) more credible macro policies is the right time to think of alternative
debt contracts that deal with moral hazard issues and are less costly for
countries (perhaps with a less strong link to the pro-cyclicality of fiscal
policies):


Bonds linked to Real-GDP Growth: can have a stabilizing force on
debt/GDP ratios and come with additional benefits such as a reduced
likelihood of debt crises and the reduced need for pro-cyclical fiscal policies
Inflation-linked bonds: costly to deviate from sound monetary and fiscal
policies
23
Thank you
24