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Share: Debt ceiling “clash” will lead to major cuts in social spending
Preview: Debt ceiling “clash” will lead to major cuts in social spending
The Biden administration and the Republican-controlled House of Representatives have begun a series of political maneuvers and backroom discussions on raising the federal debt ceiling, which now stands at $31.4 trillion. Federal authority to borrow has run out, and the Treasury will exhaust short-term financial manipulations to avert a default on debt by early June, according to Treasury Secretary Janet Yellen. [....]
Share: With debt out of control, Republicans can’t be intermittent fiscal hawks
Preview: With debt out of control, Republicans can’t be intermittent fiscal hawks
After a hiatus during the Trump years, Republicans are back in the mood for fiscal probity. It’s very strange not to seriously pursue a deeply held goal when you have unified control of Washington, then to insist on trying to achieve much of it in one fell swoop when you barely have control of one chamber of Congress. [....]
Share: Rising interest rates have a sting in the tail for Europe's banks
Preview: Rising interest rates have a sting in the tail for Europe's banks
Rising borrowing costs are giving a long-awaited lift to Europe's beleaguered banks, but they come with a sting in the tail.[..]
Share: World’s ESG Debt Pile to Shoot Past $5 Trillion as Sales Pick Up
Preview: World’s ESG Debt Pile to Shoot Past $5 Trillion as Sales Pick Up
The global sum of socially conscious debt is barreling toward $5 trillion as Wall Street’s pursuit of sustainable investments fuels demand for the bonds and loans. [....]
Share: China debt: is the bubble about to burst, and what is driving the crisis among local governments?
Preview: China debt: is the bubble about to burst, and what is driving the crisis among local governments?
Credit conditions for China’s heavily indebted local governments are likely to worsen this year, according to analysts, as weak land sales revenue, high fiscal deficits and growth in liabilities persist, triggering concerns about rising default risks. [....]
Share: Debt Exchange Programme: Jubilee House, EMT against inclusion of individual bondholders – Bright Simons
Preview: Debt Exchange Programme: Jubilee House, EMT against inclusion of individual bondholders – Bright Simons
Honorary Vice President of IMANI Africa, Bright Simons, is alleging that Ghana’s Economic Management Team and the Presidency are against the inclusion of individual bondholders in the domestic debt exchange programme. [....]
Share: US House Republicans considering kicking the US debt ceiling can to September 30
Preview: US House Republicans considering kicking the US debt ceiling can to September 30
The bad news is the debt limit debacle is playing out again. The good news is three may be a little more breathing room, the House Republicans are considering kicking the can down the road a little further, to September 30. [....]
Share: Lao government seeks to rein in external debt by cutting new projects
Preview: Lao government seeks to rein in external debt by cutting new projects
The Lao government has come up with a plan to try to reduce the country’s crushing external debt this year by eliminating investments in new state projects that are not profitable and by inspecting out-of-scope projects that will not generate tax revenue, though few details about the plan are known. [....]
Share: Brazil's Treasury forecasts rise in public debt, stresses 'commitment to 'fiscal balance'
Preview: Brazil's Treasury forecasts rise in public debt, stresses 'commitment to 'fiscal balance'
Brazil's outstanding public debt is expected to increase this year up to 14%, the Treasury said on Thursday, and it stressed that commitment to the public accounts balance will be essential to lengthen the country's debt profile.[..]
Future economic challenges – Lawrence Zammit - [Global]
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Preview: Future economic challenges – Lawrence Zammit
Last week’s contribution was about the theme of this year’s meeting of the World Economic Forum in Davos. The meeting is now over, and apart from the issues that were on the agenda, it is also worth looking into what the participants discussed. What were the most important issues that emerged from this meeting and which represent our future economic challenges? [...]
Share: Spain's Economy grew more than exptected in 4Q
Preview: Spain's Economy grew more than exptected in 4Q
The Spanish economy expandend more than expected in 2022's forth quarter, but there were increasing signs that still-high inflation and rising interest rates took a toll at year-end despite government supports and lower energy prices. Spain's gross domestic product grew 0.2% in the fourth quarter [...]
Share: Ghana reaches deal with insurers on domestic debt exchange
Preview: Ghana reaches deal with insurers on domestic debt exchange
Ghana has reached an agreement with the country's insurers on a domestic debt exchange, taking it closer to completing this programme, a key factor in restoring economic stability and growth, the finance ministry said on Thursday. [...]
Share: The Year of Debt Distress and damaging development Trade-Off
Preview: The Year of Debt Distress and damaging development Trade-Off
As the year 2022 drew to an end, the United Nations Conference on Trade and Development (UNCTAD) warned, “Developing countries face ‘impossible trade-off’ on debt”, that spiralling debt in low and middle-income countries (LMICs) has compromised their chances of sustainable development. [...]
Share: Ethiopia and the World Bank sign financing agreements worth $745 million
Preview: Ethiopia and the World Bank sign financing agreements worth $745 million
Ethiopian Ministry of Finance and the World Bank have signed two Financing Agreements amounting to a total of $745 million, approximately 39.8 billion ETB, both in the form of grants. [...]
MNB raising Lenders' Reserve Ratio - [Hungary]
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Preview: MNB raising Lenders' Reserve Ratio
At a press conference after the monthly policy meeting of the Monetary Council, National Bank of Hungary (MNB) deputy governor Barnabás Virág said the council had decided to raise lenders' mandatory reserve ratio from 5% to 10% from April 1. [...]
Share: India Bond Veteran sees lower yields but no Rate Cuts in 2023
Preview: India Bond Veteran sees lower yields but no Rate Cuts in 2023
India bond traders pricing in a rate cut this year may be disappointed, with local growth good and the US unlikely to go through a recession, according to a top official at Bank of America Corp. [...]
Share: Indian bond yields rise ahead of debt auction, federal budget
Preview: Indian bond yields rise ahead of debt auction, federal budget
Indian government bond yields rose on Friday, with the benchmark yield hitting levels seen nearly three months ago, ahead of a fresh supply of debt later in the day and next week’s budget announcement. [....]
Rates Spark: Central banks vs economic data - [Global]
Share: Rates Spark: Central banks vs economic data
Preview: Rates Spark: Central banks vs economic data
Next week sees the three major central banks' first policy meetings of 2023. Yet key data releases framing the meetings will mean an ongoing tug of war between the inflation and recession narratives in the market. Stretched valuations are at risk from more vocal central banks arguing that their jobs are not done. [....]
Share: Mongolia's PM discusses post-pandemic economic recovery with Ambassador of France
Preview: Mongolia's PM discusses post-pandemic economic recovery with Ambassador of France
Prime Minister of Mongolia Oyun-Erdene Luvsannamsrai received Ambassador of France to Mongolia Sebastien Surun and exchanged views on bilateral relations and cooperation on January 26. [....]
Research Papers
The impact of sovereign tensions on bank lending: identifying the channels at work - [Fabiana Sabatini] - [Secondary Markets]
Share: The impact of sovereign tensions on bank lending: identifying the channels at work
Preview: The impact of sovereign tensions on bank lending: identifying the channels at work
This paper assesses the impact of the two main direct channels through which tensions in sovereign bond markets are transmitted to banks’ balance-sheets and to their ability to provide credit. In particular, it disentangles the effect stemming from the worsening in banks’ capitalization (balance sheet channel) from that associated with a reduced ability to raise funds using government bond holdings as collateral (liquidity channel). The results indicate that, after the sudden rise in yields on Italian government bonds observed in May 2018, the banks with a higher ratio of those bonds to total assets reduced credit supply to firms more, in line with the literature. The work also shows that the more marked credit contraction mainly reflected the negative shock on bank capitalization, while the liquidity channel would not be activated.
Sovereign Debt Puzzles - [Patrick Bolton, Ugo Panizza, Mitu Gulati] - [Debt Policy]
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Preview: Sovereign Debt Puzzles
We review the state of the sovereign debt literature and point out that the canonical model of sovereign debt cannot be easily reconciled with several facts about sovereign debt pricing and servicing. We identify and classify twenty puzzles. Some are well known and documented, others are less so and are sometimes based on anecdotal evidence. We classify these puzzles into three categories: puzzles about how sovereigns issue debt; puzzles about the pricing of sovereign debt; and puzzles about sovereign default and the working out of defaults. We conclude by suggesting possible avenues for new research aimed at reconciling theory with what we observe in the real world.
A Comprehensive Analysis of Recent Flood Disaster & Their Economic Impact on Pakistan Economy & Its Causes - [Muhammad Ali] - [Macroeconomic Analysis]
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Preview: A Comprehensive Analysis of Recent Flood Disaster & Their Economic Impact on Pakistan Economy & Its Causes
In the current situation, Pakistan is not only suffering from a political crisis but also from a severe economic crisis. At present, Pakistan cannot bear the burden of any kind of minor crisis, whether it is social, political, economic any other type of crisis. At present, the external debt of Pakistan is $110b Billion & internal debt in Pakistan also touching the sky The public debt of Pakistan is around 54 Trillion PKR ($248.7Billion) which is 80.2 percent of the Gross Domestic Product. At present Pakistan is taking a package of $1 Billion from the IMF (International Monetary Fund), At the same time, floods start in the northern province of Pakistan KPK (Khyber Pakhtunkhwa) area in Pakistan & causing irreparable damage to this province as well also spreading destruction through south Punjab Province & its adjacent area & also spread destruction in Provinces Sindh & Balochistan. According to a conservative estimate, the flood caused an economic loss of $30 billion in Pakistan's quarter of the country's external debt.
What Triggered China's Urban Debt Risk? Snowball Effect Under the Growth Target Constraint - [Wenfeng Mao, Jun Lu, Siyuan Cai, Haotian Yang] - [Economic Policies]
Share: What Triggered China's Urban Debt Risk? Snowball Effect Under the Growth Target Constraint
Preview: What Triggered China's Urban Debt Risk? Snowball Effect Under the Growth Target Constraint
The root causes and governance of subnational debt are intensely discussed in regional and policy research. This study contributes to literature by using the growth target constraints as a lens to investigate the boom of urban debt under political incentives. Using the urban construction investment bonds data of 270 prefecture-level cities from 2007 to 2015, we find that the competition for growth of subnational governments is the endogenous root of the boom of urban debt. The growth target constraint triggers subnational governments to carry out irrational debt financing through the leverage amplification effect of land leasing and mortgage, and to invest a large amount of financing in infrastructure construction. Unfortunately, these impulsive investments have low returns in terms of efficiency, which ultimately affects debt repayment. Accordingly, urban debt has shown considerable growth in this debt-stimulated model, which we attribute as the “snowball effect” of urban debt risk.
A Fiscal Theory of Central Bank's Solvency: Perils of the Quantitative and Qualitative Monetary Easing - [Hidekazu Niwa] - [Economic Policies]
Share: A Fiscal Theory of Central Bank's Solvency: Perils of the Quantitative and Qualitative Monetary Easing
Preview: A Fiscal Theory of Central Bank's Solvency: Perils of the Quantitative and Qualitative Monetary Easing
Under the Quantitative and Qualitative Monetary Easing (QQE), the Bank of Japan has purchased long-term Japanese government bonds. To study monetary policy after the Bank of Japan exits from the QQE, we develop a model in which the fiscal authority commits: (ⅰ) not to making fiscal adjustments needed to stabilize public debt, and (ⅱ) not to providing financial supports for the central bank that incurs losses on its balance sheet due to a decline in the price of long-term bonds. Within this framework, this study investigates how the interaction of these commitments reduces the ability of monetary policy to control inflation after liftoff from the zero lower bound. We consider a situation in which the central bank that holds long-term bonds raises the nominal interest rates and show two key results: (ⅰ) when the Taylor principle is not satisfied, under certain conditions, inflation right after liftoff cannot overshoot the central bank’s target; (ⅱ) when the central bank follows the Taylor principle, under certain conditions, it cannot prevent the economy from converging to the deflationary steady state.
Debt Sustainability and Monetary Policy: The Case of ECB Asset Purchases - [Enrique Alberola, Gong Cheng, Andrea Consiglio, Stavros A. Zenios] - [Economic Policies]
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Preview: Debt Sustainability and Monetary Policy: The Case of ECB Asset Purchases
We incorporate monetary policy into a model of stochastic debt sustainability analysis and evaluate the impact of unconventional policies on sovereign debt dynamics. The model optimizes debt financing to trade off financing cost with refinancing risk. We show that the ECB pandemic emergency-purchase programme (PEPP) substantially improves debt sustainability for euro area sovereigns with a high debt stock. Without PEPP, debt would be on an increasing (unsustainable) trajectory with high probability, while, with asset purchases, it is sustainable and the debt ratio is expected to return to pre-pandemic levels by about 2030. The improvement in debt dynamics extends beyond the PEPP and is larger for more gradual unwinding of the Central Bank balance sheet. Optimal financing under PEPP induces an extension of maturities reducing the risk without increasing costs. The analysis also shows that inflation surprises have relatively little impact on debt dynamics, with the direction and magnitude of the effect depending on the monetary policy response.
Appetite for Treasuries, Debt Cycles, and Fiscal Inflation - [Fei Tan] - [Economic Policies]
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Preview: Appetite for Treasuries, Debt Cycles, and Fiscal Inflation
Despite accelerating debt levels, the real yield on U.S. Treasuries remains low due to investors' desire for their extreme safety and liquidity services. The convenience premium on Treasuries allows fiscal policy to pursue profligate budget plans without imposing inflationary threats on a low-interest-rate monetary policy. Exploring these economic relations in a change-point vector autoregression model, I estimate the time-varying properties of U.S. inflation and its stance of fiscal policy that characterize long-term debt cycles. An archetypal debt cycle consists of alternating phases of persistent deficits and surpluses in tandem with alternating patterns of inflation and fiscal stance. In line with these key properties found in the data, I present a simple analytical model based on the fiscal theory of the price level where the household has a preference for holding government bonds. Determinacy admits a standard passive monetary policy coupled with a broad range of active fiscal policy. When the real interest rate falls below the economy's growth rate, permanent fiscal deficits can be sustained in the long run. The model explains why fiscal inflation has largely remained benign over the past two decades.
U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis - [Andrew Hodge, Zoltan Jakab, Jesper Lindé , Vina Nguyen] - [Economic Policies]
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Preview: U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis
This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks. Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.
Who Is Afraid of Eurobonds? - [Francesco Bianchi, Leonardo Melosi, Anna Rogantini Picco] - [Debt Policy]
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The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. At the same time, the current framework also exposes the EA to the risk of fiscal stagflation if one country were to refuse to implement the necessary fiscal consolidations. We study a new framework that allows EA policymakers to separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. Following a contractionary shock, the central bank tolerates the increase in inflation needed to stabilize the amount of Eurobonds issued in response to a large EA recession. National governments remain responsible to back their country-level debt by fiscal adjustments. The policy acts as an automatic stabilizer that benefits both high-debt and low-debt countries, generating a moderate increase in inflation that mitigates the recession and allows the central bank to move away from the ZLB. At the same time, the proposed policy lowers the risk of fiscal stagflation because it endows EA countries with effective stabilization policies.
Improving Sovereign Financing Conditions Through Data Transparency - [Jesus Gonzalez-Garcia] - [Accounting, Statistics, Reporting and Auditing]
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Does it payoff to be transparent and, if so, can the benefits of transparency be measured? This paper provides an affirmative answer to both questions, supported by novel evidence on the link between transparency through dissemination of economic data and sovereign bond spreads. It explores changes in sovereign financing conditions when countries join the IMF Data Standards Initiatives—a multilateral framework that promotes data transparency as a global public good. The results from event studies and local projection models show a significant decrease in spreads following the adoption of the standards. In addition, countries with relatively weaker governance benefit the most from signaling their effort toward strengthening transparency.
Fiscal Crises: The Role of the Public Debt Investor Base and Domestic Financial Markets as Aggravating and Mitigating Factors - [R. Bhattacharya, K. Johnson, M. Nkusu, M. Wang] - [Economic Policies]
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Preview: Fiscal Crises: The Role of the Public Debt Investor Base and Domestic Financial Markets as Aggravating and Mitigating Factors
The paper evaluates the key drivers of fiscal crises in a sample of countries from all three income groups—advanced, emerging, and low-income countries, using fiscal crisis data recently developed by the IMF’s Fiscal Affairs Department. The empirical study focuses on three questions: (1) How does the composition of debtholders (domestic vs. foreign, resident vs. non-resident, or official vs. non-official) affect the probability of a fiscal crisis, after controlling for the level of public debt and other relevant variables?; (2) How does the development and size of the domestic financial sector affect the probability of a fiscal crisis?; and (3) How do changes in the debt level affect the probability of a fiscal crisis, for given compositions of the sovereign debt investor base and different levels of development and size of domestic financial markets? Our findings confirm the benefits of financial development, the danger of heavy reliance on a non-resident investor base, and also that emerging market economies have a lower debt carrying capacity compared to the full sample.
The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies - [Sumin Chun, Karmen Naidoo, Nelson Sobrinho] - [Multilateral Financing]
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Preview: The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies
We construct a high-frequency dataset that combines information on all IMF lending and proxies of monthly economic activity during the first two years of the COVID-19 pandemic (2020–21). Using this novel dataset and standard econometric techniques we find a positive and significant marginal effect of IMF financing on economic activity in low-income countries (LICs) and emerging market economies. We also present tentative evidence that IMF financing may have helped economic outcomes by easing fiscal budget constraints, allowing for larger government spending in response to the pandemic. Overall, this evidence suggests that IMF financing helped lessen the negative impacts of the pandemic on economic activity, especially in LICs.
The Risk of External Financial Crisis - [Eduardo A. Cavallo, Eduardo Fernández-Arias, Juan Martín Rinaldi] - [Macroeconomic Analysis]
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This paper explores the empirical determinants of external crises on a world panel dataset of 62 countries over the fifty-year period 1970-2019 and estimates their risk trade-offs with the aim of informing macrofinancial prudential policies. The determinants include countries external balance sheets, macroeconomic imbalances, and structural and global factors. It finds that information on the composition of gross positions in countries external financial portfolios is required to gauge the risk of external crisis: debt liabilities are the riskiest component, FDI liabilities are half as risky, and FDI assets are the most protective. Macroeconomic imbalances increase risk but are usually not the key drivers of crises. Adverse global shocks significantly leverage domestic risks. International reserves are powerful risk mitigants that provide high insurance value. The evidence shows that advanced economies are structurally more resilient to withstand exposure to weak external portfolios, macroeconomic imbalances, and global shocks. For the average country the risk of external crisis is on a declining trend mainly driven by improvements in the composition of external portfolio assets magnified by increasing financial integration as well as rising international reserves.
Central Bank Balance Sheet Expansion in a Dollarized Economy: The Case of Ecuador - [Juan-Pablo Erraez, Julien Reynaud] - [Debt Policy]
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A textbook argument in favor of adopting another country’s legal tender is that it imposes strong constraints on money creation and therefore fiscal dominance. In Ecuador, an officially dollarized economy since January 2000, a series of accounting practices and subsequent changes in legislations approved over the period 2009-2014 allowed an expansion of the Central Bank of Ecuador’s (CBE) balance sheet to finance the central government. At its peak, central bank financing of the government represented 10 percent of GDP. This resulted in large liabilities to the CBE that translated into low reserve coverage, putting the public and private financial systems and ultimately the dollarization regime at risk. In this paper, we first present the legal and accounting processes behind the expansion of the CBE's balance sheet and some stylized facts. In the second section, we establish a stress test-like methodology to show how the expansion of the CBE’s balance sheet induced strong pressures on CBE’s liquidity. Ultimately, such liquidity stress at the CBE translated into high cash inflows needs, i.e. external debt, for the central government.
Optimal Commodity Price Hedging - [Leandro Andrian, John Leon Diaz, Jorge Mondragon] - [Economic Policies]
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The dependence of many countries in the region on oil exports makes them vulnerable to oil price volatility. In particular, the sharp declines observed between 2014 and 2016 show how public finances weakened with significant debt increases in these countries. A strategy to mitigate the effect of sharp falls in oil prices would allow oil exporting countries to suffer a smaller impact on their public finances. This paper shows that using put options to insure against oil price hikes lowers public debt and fiscal deficits.
Sovereign Debt and International Trade - [Charles Serfaty] - [Macroeconomic Analysis]
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Evidence suggests that sovereign defaults disrupt international trade. As a consequence, countries that are more open have more to lose from a sovereign default and are less inclined to renege on their debt. In turn, lenders should trust more open countries and charge them with lower interest rate. In most cases, the country should also borrow more debt as it gets more open. This paper formalizes this idea in a sovereign debt model à la Eaton and Gersovitz (1981), proves these theoretical relations, and quantifies them in a calibrating model. We also provide evidence suggesting a causal relationship between trade and debt or CDS spreads, using gravitational instrumental variables from Frankel and Romer (1999) and Feyrer (2019) as a source for exogenous variation in trade openness.
How Do Rising U.S. Interest Rates Affect Emerging and Developing Economies? It Depends - [Carlos Arteta, Steven Kamin, Franz Ulrich Ruch] - [Economic Policies]
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Preview: How Do Rising U.S. Interest Rates Affect Emerging and Developing Economies? It Depends
This paper examines the implications of different types of interest rate shocks in the United States for emerging market and developing economies (EMDEs). It first classifies changes in U.S. interest rates into those caused by changes in inflation expectations (“inflation” shocks), changes in perceptions of the Federal Reserve’s reaction function (“reaction” shocks), and changes in real activity (“real” shocks). The analysis attributes this year’s sharp increases in U.S. interest rates almost exclusively to inflation and reaction shocks. These types of shocks are found to be associated with especially adverse effects: EMDE financial conditions tighten, consumption and investment fall, and governments cut spending to improve budget balances. By comparison, rising U.S. interest rates stemming from real shocks are not only associated with benign outcomes for EMDE financial conditions but also improvements in budget balances that reflect higher revenues as well as lower expenditures. Finally, this paper documents that rising U.S. interest rates driven by reaction shocks are especially likely to push EMDEs into financial crisis.
Local Government Financial Constraint and Spending Multiplier in China - [Yang Su] - [Subnational Debt]
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I estimate the present value of local GDP increases by about 11.4 RMB for 1 RMB increase of government spending during 2001-2019 at the prefecture city level in China, where the local governments play an active role in increasing economic growth. To achieve identification, I construct a novel instrument for local government spending: the fraction of unoccupied raw land in the downtown area in 2000. After 2000, as the local governments increasingly rely on land sales to finance expenditures, a higher fraction of unoccupied raw land is associated with less compensation expense to occupants removed from the land and hence higher net profits from land sales for local governments. Moreover, the fraction of raw land is orthogonal to a rich set of city fundamentals in 2000 and major confounding shocks after 2000. The high multiplier can be explained by the local government financial constraint because it is found to be significantly lower if the local governments have better access to debt financing or face less investment opportunities. The mechanism is consistent with models where government spending is investment. Higher government spending is found to increase employment and private investment, and the total output effect of the increased inputs can explain almost all the increase of local output. The paper highlights the macroeconomic importance of the financial constraint of governments that actively invest to promote economic growth.
Debt-Stabilizing Properties of Gdp-Linked Securities: A Macro-Finance Perspective - [Sarah Mouabbi, Jean-Paul Renne, Jean-Guillaume Sahuc] - [Financial Analysis]
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We study the debt-stabilizing properties of indexing debt to GDP using a consumption based macro-finance model. To this end, we derive quasi-analytical pricing formulas for any type of bond/equity by exploiting the discretization of the state-space, making large-scale simulations tractable. We find that GDP-linked security prices would embed time-varying risk premiums of about 40 basis points. For a fixed budget surplus, issuing GDP-linked securities does not imply more beneficial debt-to-GDP ratios in the long-run, while the debt-stabilizing budget surplus is more predictable at the expense of being higher. Our findings call into question the view that such securities tame debt.
Fiscal Space and Government-Spending Cyclicality: Evidence from Quantile Regression - [Yi-Chen Lin, Wen-Shuenn Deng] - [Economic Policies]
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This study applies quantile regression to a sample of 160 countries over the period 1990-2020 to explore the relationship between fiscal space and different conditional quantiles of government-spending cyclicality. Moreover, as fiscal space is a multidimensional concept, unlike the literature, which focuses on government debt sustainability, we consider additional dimensions of fiscal space that have received less attention – sovereign balance sheet vulnerability, contingent liabilities arising from the risks of external and private sector debt, and market perception of sovereign risk. Our analysis suggests that fiscal space is statistically significant only at the upper part of the conditional government-spending cyclicality distribution, i.e., fiscally procyclical countries. We also find that for fiscally procyclical countries, the share of foreign currency debt in total government debt, the share of government debt held by nonresidents in total government debt, the share of short-term external debt in total external debt, the ratio of government debt to tax revenue, natural resource dependence, inflation have a procyclical effect, whereas sovereign debt rating, financial depth, and the share of short-term debt in total external debt have a countercyclical effect.
Reports
It’s the currency, stupid - [Ruurd Brouwer]
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Covid was not these countries’ fault. The lack of global cooperation in tackling it was not their fault. The lack of adequate external official funding was not their fault. The global inflation was not their fault. The war is not their fault. But if the high-income countries do not offer the help they nae evidently need, it will unambiguously be their fault.
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Attachments:
Fiscal policy implications of euro area countries’ 2023 draft budgetary plans - [Johannes Simeon Bischl, Stephan Haroutunian, Sebastian Hauptmeier Steffen Osterloh]
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On 22 November 2022 the European Commission released its opinions on the draft budgetary plans (DBPs) of euro area countries for 2023. In its assessment of whether the budgetary plans for 2023 are in line with the Council’s recommendations, the Commission focused on the compliance of countries with an indicator developed in the context of the coronavirus (COVID-19) crisis which adjusts the SGP expenditure benchmark. […]
Share: World Bank supports crisis-hit Sri Lanka’s efforts to reduce interest rate risk on its loans
Preview: World Bank supports crisis-hit Sri Lanka’s efforts to reduce interest rate risk on its loans
Interest rate risk can increase the cost of public debt, put pressure on country’s budget, and make it harder to reach development objectives. During its unprecedented crisis, World Bank helped Sri Lanka to strengthen its capacity to understand and manage financial risks, protect part of its budget against interest rate volatility and potentially save $38 million on the cost of public debt.
What is Sovereign Debt? - [S.M. Ali Abbas, Alex Pienkowski]
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When Edward III of England ran out of money to finance the Hundred Years’ War with France, he turned to the banking families of Florence. The loans they gave him were extremely expensive, and when Edward failed to become king of France, he was unable to repay the debt in full. Over the centuries, the sovereign’s debt became sovereign debt: the multitrillion, multinational, multicurrency network of debt obligations that we know today. […]
Share: Colombia’s Cat DDO: Strengthening Resilience to Disasters, Climate Change and Health Risks
Preview: Colombia’s Cat DDO: Strengthening Resilience to Disasters, Climate Change and Health Risks
The USD 300 million Third Disaster Risk Management Development Policy Loan (DPL) with a Catastrophe Deferred Drawdown Option (Cat DDO) will help Colombia reduce disaster, climate, and public health risks. Exogenous shocks from disasters, pandemics, and commodity price adjustments can harm a country’s fiscal balance. An IBRD loan with a Cat DDO can help countries mitigate such risks by making a line of credit available to them.[...]
Climate resilience and sustainable sovereign debt - [Leora Klapper]
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2022 is already a record-breaker in the number of climate change-related events, and developing countries must now pay for the repairs and remediation needed to combat the consequences. Although the international community pledged support at the UN Climate Conference (COP27), the costs of shoring up economies for the reality of a changing climate also fall on developing countries themselves and require supportive fiscal policies. […]
Share: E-course on parliament's role in public debt
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In this unique online learning programme, WFD supports parliamentarians, parliamentary staff and those engaged in public financial management in exploring the key concepts, mechanisms and risks which impact public debt management.
Policy briefs on parliamentary public debt management - [Geoff Dubrow]
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These policy briefs, produced by WFD and the National Democratic Institute (NDI) provide information on the role of parliaments in debt transparency and debt sustainability explain parliamentary roles and good practices related to public debt. They are four policy briefs, structured around key themes: General debt management, which covers key concepts and definitions in public debt management and entry points for parliament to influence public debt management; […]
A Pandemic of Debt - [José Antonio Ocampo]
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Hammered by tightening financial conditions and steep currency depreciations, dozens of developing countries are either teetering on the edge of a debt crisis or have already defaulted. The international community must respond by providing immediate relief, creating new restructuring mechanisms, and introducing ambitious reforms.
Do financial markets consider European common debt a safe asset? - [Giovanni Bonfanti, Luis Garicano]
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Preview: Do financial markets consider European common debt a safe asset?
The COVID-19 pandemic led to a dramatic change in common borrowing by the European Union. With the introduction of SURE (Support to mitigate Unemployment Risks in an Emergency) and NGEU (NextGenerationEU) – programmes unprecedented in size and objectives – the EU shifted from being a small player in the sovereign market to a very significant one. EU debt (a slightly too broad concept, as discussed below) increased in two years from around €50 billion to over €300 billion. […]
Don’t look only to Brussels to increase the supply of safe assets in the European Union - [Francesco Papadia, Heliodoro Temprano Arroyo]
Share: Don’t look only to Brussels to increase the supply of safe assets in the European Union
Preview: Don’t look only to Brussels to increase the supply of safe assets in the European Union
A sufficient supply of safe assets denominated in euros is critical if the European Union is to achieve full banking and capital markets union while fostering the euro’s international role. The European debate on developing the supply of safe assets has so far focused on the possible creation of a common safe asset. This has tended to underplay the potential contribution of sovereign asset. […]
Share: A World Bank Facility makes funding affordable for countries hosting refugees
Preview: A World Bank Facility makes funding affordable for countries hosting refugees
The Global Concessional Financing Facility (GCFF) funds projects for refugees in middleincome countries. The World Bank Treasury helped create the Facility’s financial framework that provides a low-cost and streamlined financial and administrative solution for all stakeholders. When countries get a sudden influx of refugees, they struggle to expand their infrastructure and social services to accommodate the new population. […]
Share: Helping an Indonesian non-bank financial institution mobilize private capital for sustainable infrastructure
Preview: Helping an Indonesian non-bank financial institution mobilize private capital for sustainable infrastructure
The World Bank provided technical assistance to PT Indonesia Infrastructure Finance to issue a USD 150 million, 5-year sustainability bond to fund infrastructure projects that are environmentally and socially sustainable. This is the first sustainability bond issued by a non-banking financial institution in Indonesia. With its tropical rainforests and long coastline, Indonesia is a key player in the fight against climate change.
Angola’s Interest Rate fixings generate USD 270 Million in potential savings - [The World Bank]
Share: Angola’s Interest Rate fixings generate USD 270 Million in potential savings
Preview: Angola’s Interest Rate fixings generate USD 270 Million in potential savings
The World Bank Treasury supported Angola to reduce interest rate risks on 98 percent of their IBRD outstanding debt amount and helped create up to USD 270 million in potential savings on the estimated interest repayment. As the interest rates started to increase globally in 2021, the Angolan government was concerned about financial risks associated with variable reference rates. […]
Roundtable Discussion: Climate Budget Tagging and Engaging with Investors - [The World Bank]
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Preview: Roundtable Discussion: Climate Budget Tagging and Engaging with Investors
On September 13, 2022, the World Bank Treasury Sustainable Finance Advisory organized a roundtable discussion to share investors' interest in climate-related information and showcase the value of climate budget tagging. The benefits of Climate Budget Tagging are multiple. The mechanism promotes transparency and accountability, enabling the prioritization of investments towards national objectives and international commitments. It also raises awareness of and showcases efforts to tackle climate challenges, fosters better cooperation between government ministries, and mobilizes domestic and international finance by enabling the tracking of the allocation of resources. […]
Egypt-The first Sovereign Green Bond in the Middle East and North Africa - [Farah Hussain]
Share: Egypt-The first Sovereign Green Bond in the Middle East and North Africa
Preview: Egypt-The first Sovereign Green Bond in the Middle East and North Africa
We issued the first sovereign green bond offering in the Middle East and North Africa, with a value of US$750 million for 5 years at a yield of 5.25 percent, putting the Arab Republic of Egypt on the map of sustainable financing. As of September 2020, Egypt had a portfolio of eligible projects worth US$1.9 billion, of which 16 percent was in renewable energy, 19 percent in clean transportation, 26 percent in sustainable water and sanitation management, and 39 percent in pollution reduction and control. […]
The response to debt distress in Africa and the role of China - [Alex Vines Obe, Creon Butler, Yu Jie]
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Preview: The response to debt distress in Africa and the role of China
The economic consequences of the COVID-19 pandemic and Russia’s invasion of Ukraine have undermined the ability of many African nations to service their sovereign debts. At present, 22 low-income African countries are either already in debt distress or at high risk of debt distress. Chinese lenders account for 12 per cent of Africa’s private and public external debt, which increased more than fivefold to $696 billion from 2000 to 2020. [...]
2023 Global Macro Outlook: Inflation peaks, growth slows - [Morgan Stanley]
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Preview: 2023 Global Macro Outlook: Inflation peaks, growth slows
Next year is likely to see weaker growth, less inflation and the end of rate hikes, with the U.S. narrowly missing a recession, Europe contracting and Asia offering green shoots for growth. With excessive post-COVID consumer demand, bloated retail inventories and the battle against inflation continuing to weigh on growth in 2023, Morgan Stanley believes global GDP growth will top out at just 2.2%, narrowly defying recession, but lower than the 3% growth expected for 2022.[…]
If it doesn’t trade, is it really marketable debt? - [Rebecca Christie]
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Preview: If it doesn’t trade, is it really marketable debt?
When it comes to encouraging fiscal discipline, euro-area policymakers want the market to be part of the solution. This will not succeed until they make peace with the idea that, while it is their job to set conditions and incentives, it is not their job to dictate prices and spreads. Within the environment that policy creates, market discipline is something the market does to itself, not something a government imposes when it disapproves of national choices. Governments need to get used to market-set prices as a source of strength and information, not just a source of risk. […]
Share: Financing the 30x 30 agenda for the Oceans: Debt for Nature swaps should be rejected
Preview: Financing the 30x 30 agenda for the Oceans: Debt for Nature swaps should be rejected
At the UN Biodiversity Conference, or COP-15, the post-2020 framework will likely endorse the target of declaring 30% of the world’s land and oceans as protected areas by 2030. We recognise that protected areas can be effective means to restore and conserve biodiversity and support coastal communities who rely on fisheries for their livelihoods and food security. The success of the post-2020 framework is dependent on participatory and transparent approaches to locating such areas and developing rules on what commercial activities are permitted in them. […]