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Share: President Tokayev Strengthens Investment Council Powers to Boost Economic Growth
Preview: President Tokayev Strengthens Investment Council Powers to Boost Economic Growth
Kazakh President Kassym-Jomart Tokayev has signed a landmark decree on Dec. 4 regarding measures to increase the efficiency of attracting investment into Kazakhstan’s economy and accelerating economic growth, reported the Akorda press service. The decree outlines a comprehensive plan to empower the Investment Promotion Council (Investment Headquarters) with unprecedented authority. [....]
Share: Mbah Presents N521.5bn ‘Disruptive Growth’ Budget, Makinde N434.2bn ‘Economic Recovery’, Obaseki N325.3bn ‘Finishing Strong’
Preview: Mbah Presents N521.5bn ‘Disruptive Growth’ Budget, Makinde N434.2bn ‘Economic Recovery’, Obaseki N325.3bn ‘Finishing Strong’
The Governor of Enugu State, Dr. Peter Mbah, yesterday presented a N521.5 billion budget for the 2024 fiscal year before the Enugu State House of Assembly. The budget proposal, which he tagged: “Budget of Disruptive Economic Growth” is the highest in the state’s history, comprising N414.3 billion capital expenditure and N107.2 billion recurrent expenditure. [....]
Share: Guyana's economy to double again in four years
Preview: Guyana's economy to double again in four years
Data from the International Monetary Fund (IMF) suggest the Guyanese economy is set to double its 2022 level in the next four years, due largely to continued strong growth from that country's oil sector. [....]
Share: IMF gives recommendations for sustainability of Kyrgyzstan’s economy
Preview: IMF gives recommendations for sustainability of Kyrgyzstan’s economy
The head of the mission Nikoloz Gigineishvili noted that the Kyrgyz economy performed strongly in 2022 and expanded at 6.3 percent despite the headwinds from the difficult regional environment. Tax revenue improved sharply, and public debt declined to 49 percent of GDP. Headline inflation fell from 14.7 percent in December 2022 to 9.2 percent in October 2023, but demand pressures have kept core inflation elevated. [....]
Improved economy propels PSX to new highs - [Pakistan]
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Preview: Improved economy propels PSX to new highs
Stock Exchange (PSX) reached unprecedented highs on Tuesday and hit the peak close to 63,000 points, driven by a 9% month-on-month rise in oil sales and anticipation surrounding the upcoming release of the International Monetary Fund (IMF) loan tranche. [....]
Share: Kyrgyzstan's budget surplus expected to make 1.6% of GDP in 2024
Preview: Kyrgyzstan's budget surplus expected to make 1.6% of GDP in 2024
The national budget surplus will make 19.644 billion soms or 1.6% of GDP in 2024, according to the draft budget for 2024.The given surplus will be used to finance expenses related to transactions with financial assets and to repay the principal sum of public external debt.[....]
Share: Australia Economy Surprisingly Slows as Rate Hikes Damp Spending
Preview: Australia Economy Surprisingly Slows as Rate Hikes Damp Spending
Australia’s economy surprisingly slowed sharply in the three months through September as consumers hunkered down and further depleted their savings in the face of rising borrowing costs and elevated prices. [....]
Govt likely to retreat from its quest for higher growth - [Bangladesh]
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Preview: Govt likely to retreat from its quest for higher growth
The economy is perhaps slowing, not sprinting. And the government is likely to lower its economic growth target by one percentage point for the fiscal year ending in June, veering from its quest for a higher trajectory in times of austerity. [....]
Global slowdown threatens Thai growth - [Thailand]
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Preview: Global slowdown threatens Thai growth
Although the Bank of Thailand's revised GDP growth forecast of 3.2-3.8% next year is possible, analysts are warning that an economic slowdown in China and the US means downside risks remain, while the effectiveness of government stimulus to ignite the economy is questioned.[....]
Share: Ghanaians should applaud us for saving the economy — BoG boss Addison tells Ghanaians
Preview: Ghanaians should applaud us for saving the economy — BoG boss Addison tells Ghanaians
The Governor of the Bank of Ghana, Dr. Ernest Addison has called on Ghanaians to praise them for working tirelessly to save the ailing economy from collapse despite the challenges it faced over the period. [....]
Share: Economy has started picking up: Finance Minister Mahat
Preview: Economy has started picking up: Finance Minister Mahat
Finance Minister Dr Prakash Sharan Mahat has said that the country’s economy is on improvement trajectory. Talking to journalists here today, he said the economy has started to pick up. “The number of foreign tourists visiting Nepal and the remittance inflow has increased. The problems of entrepreneurs who are in difficulty would be addressed.[...]
Share: Mexico Charts Path for Digital Industrial Growth
Preview: Mexico Charts Path for Digital Industrial Growth
Mexican business leaders and academics recently introduced a new digital industrial policy. Their aim is to advance the nation’s economic and social development in the current global climate. This strategy marks Mexico’s response to the evolving international economic scene.[...]
Share: Russia's consolidated budget sees surplus of 212.8 bln rubles in 10M 2023 - treasury department
Preview: Russia's consolidated budget sees surplus of 212.8 bln rubles in 10M 2023 - treasury department
Russia's consolidated budget saw a surplus of 212.8 billion rubles in January-October 2023, according to the Federal Treasury's preliminary estimates, as posted in materials on its website. The consolidated budget saw a deficit of around 1.037 trillion rubles in January-September 2023, meaning that the surplus totaled 1.25 trillion rubles in October.[...]
Share: Exclusive: ECB hawk Schnabel takes rate hike off table after 'remarkable' inflation drop
Preview: Exclusive: ECB hawk Schnabel takes rate hike off table after 'remarkable' inflation drop
The European Central Bank can take further interest rate hikes off the table given a "remarkable" fall in inflation and policymakers should not guide for rates to remain steady through mid-2024, ECB board member Isabel Schnabel told Reuters. The comments mark a dovish shift for Schnabel, seen as the most influential voice in the conservative camp of policymakers, and drove up rate cut expectations on Tuesday as investors now expect the ECB to reverse the steepest increase in interest rates in the bank's quarter century history.[...]
Share: Treasury yields fall as investors await labor market data
Preview: Treasury yields fall as investors await labor market data
U.S. Treasury yields declined Tuesday as investors awaited jobs data that could provide hints about the state of the economy and the impact of restrictive Federal Reserve monetary policy.[...]
Share: AUD/USD gets drawn back to key technical level after RBA hold
Preview: AUD/USD gets drawn back to key technical level after RBA hold
The pair is down 0.6% on the day to 0.6582 currently with the aussie lagging against the rest of the major currencies bloc, after the RBA kept the cash rate unchanged in its final policy decision for the year. This key passage from November (after they raised the cash rate) was maintained: "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."[...]
Pound-Euro Risks Skewed to the Upside for Now: MUFG - [United Kingdom]
Share: Pound-Euro Risks Skewed to the Upside for Now: MUFG
Preview: Pound-Euro Risks Skewed to the Upside for Now: MUFG
According to an investment bank analyst we follow, Pound Sterling can extend a recent advance against the Euro. Derek Halpenny, Head of Research for Global Markets at MUFG, says the British Pound will find itself particularly well supported against the Euro, given his expectations that the Bank of England will cut interest rates after the European Central Bank.[...]
South African Rand Not Living Up to Expectations, Says Goldman Sachs - [South Africa]
Share: South African Rand Not Living Up to Expectations, Says Goldman Sachs
Preview: South African Rand Not Living Up to Expectations, Says Goldman Sachs
The South African Rand should be getting its skates on and outperforming its global peers as the U.S. Dollar retreats, according to Goldman Sachs, but it has disappointed.[...]
Share: Tokyo inflation slows, but don’t be tricked by the headline
Preview: Tokyo inflation slows, but don’t be tricked by the headline
The headline inflation rate moved down faster than expected to 2.6% year-on-year in November (vs 3.2% in October, 3.0% market consensus), the slowest since August 2022. This was mainly due to declines in supply side-driven prices such as fresh food, utilities, and transportation. Core inflation also missed the market consensus but still remained relatively stickier than the headline.[...]
Research Papers
Dollar and government bond liquidity: evidence from Korea - [Jieun Lee] - [Macroeconomic Analysis]
Share: Dollar and government bond liquidity: evidence from Korea
Preview: Dollar and government bond liquidity: evidence from Korea
Using unique tick-by-tick data from an exchange, this paper examines the relationship between the US dollar and liquidity in the Korean government (Treasury) bond market. We find that a strong US dollar deteriorates the Treasury market's liquidity by increasing the bid-ask spread and the price impact and lowering market depth. The effects of fluctuations in the broad US dollar index on Treasury market liquidity become more pronounced when funding liquidity conditions are tighter, when banks' total capital ratio is lower with greater foreign currency risk, or when there is a larger sell-off of Korean Treasury bonds by foreign investors. The empirical evidence supports the financial channel of exchange rates affecting Treasury market liquidity. In particular, a strong dollar as a global risk factor is likely to limit the market intermediation capacity of emerging market dealers through the currency exposures of borrowers or dealers and thus tighten market conditions.
Authorities’ Fiscal Forecasts in Latin America: Are they Optimistic? - [Metodij Hadzi-Vaskov, Luca Antonio Ricci, Alejandro Mariano Werner, Rene Zamarrip] - [Macroeconomic Analysis]
Share: Authorities’ Fiscal Forecasts in Latin America: Are they Optimistic?
Preview: Authorities’ Fiscal Forecasts in Latin America: Are they Optimistic?
Do governments in Latin America tend to be optimistic when preparing budgetary projections? We address this question by constructing a novel dataset of the authorities’ fiscal forecasts in six Latin American economies, using data from annual budget documents over the period 2000–2018. We compare such forecasts with the outturns reported in the corresponding budget documents of the following years, to understand the evolution of fiscal forecast errors. Our findings suggest that: (i) there is no general optimistic bias in the forecasts for the fiscal balance-to-GDP ratio; (ii) over time, fiscal forecasts have improved for some countries and worsened for others; (iii) forecast errors for the fiscal balance-to-GDP ratio are positively correlated with GDP growth and terms-oftrade changes, and negatively correlated with GDP deflator surprises; (iv) forecast errors for public debt-to-GDP ratios are negatively associated with surprises to GDP growth; and (v), budget balance rules may help contain fiscal forecast errors.
Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries - [Joshua Aizenman et al.] - [Debt Policy]
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Preview: Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries
This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization.
The bright side of the doom loop: banks’ sovereign exposure and default incentives - [Luis E. Rojas, Dominik Thaler] - [Macroeconomic Analysis]
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Preview: The bright side of the doom loop: banks’ sovereign exposure and default incentives
The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bond aka. ESBies). A backstop by the central bank (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated.
Financial stability considerations in the conduct of monetary policy - [Paul Bochmann, Daniel Dieckelmann, Stephan Fahr, Josef Ruzicka] - [Economic Policies]
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Preview: Financial stability considerations in the conduct of monetary policy
We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities, and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be accompanied initially by subdued financial stress which resurges, however, over a medium-term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. We find unconventional monetary policy to be similarly effective in reducing inflation, but with a lower adverse effect on growth and financial stress. Tighter unconventional monetary policy is also found to have a dampening effect on the build-up of financial vulnerabilities.
How to Prevent Debt from Hurting Economic Growth - [Oscar Valencia et al. ] - [Financial Analysis]
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Preview: How to Prevent Debt from Hurting Economic Growth
Three years after the onset of the COVID-19 pandemic, countries in Latin America and the Caribbean (LAC) are still dealing with its economic consequences. Currently, one of the main points of concern is the excessive level of public indebtedness and the risk it represents to economic stability and economic growth. This year the IDB published its flagship study Development in the Americas – Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean. It shows that the pandemic accelerated the pace of public indebtedness and slowed economic growth in the region, a trend that had already been emerging in previous years. Since 2020 public debt levels rose by 15 percentage points (pp) of the region’s gross domestic product, to 71 percent. That adds up to the 18-percentage point increase between 2014 and 2019. Unfortunately, increased debt has not helped boost growth nor overall economic productivity. Figure 1 below shows that economic growth has been slowing down in the region because of a reduction in total factor productivity, especially of labor and capital. Economic growth in the region has gradually slipped to a mere average of 2 to 2.5% in the medium term. […]
Drivers of Fiscal Sustainability: A Time-Varying Analysis for Portugal - [António Afonso, José Carlos Coelho] - [Macroeconomic Analysis]
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Preview: Drivers of Fiscal Sustainability: A Time-Varying Analysis for Portugal
We assess the drivers of fiscal sustainability in Portugal during the period 1999Q4-2021Q4. We resort to expanding window and Schlicht (2003, 2021)’s time-varying approaches to construct the responses of government revenues to government expenditures and the responses of the primary government balance and the cyclically adjusted primary government balance (CAPB) to the debt-to-GDP ratio. Our results show the prevalence of a Ricardian fiscal regime in Portugal. If the (i-g) differential is positive, the positive response of the primary government balance to the debt-to-GDP ratio is amplified. An improvement in the external accounts, the increase in the European Commission's fiscal rules index and the extension of the debt maturity were beneficial for fiscal sustainability. Sovereign debt rating downgrades implied a posterior fiscal reaction that improves fiscal sustainability. Moreover, fiscal sustainability increased during the implementation of the international financial assistance program to Portugal, between 2011Q2 and 2014Q2.
A European Mechanism for the Issuance and Initial Distribution of Debt Securities - [Georgios Pavlidis] - [Institutional and Organizational Framework]
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Preview: A European Mechanism for the Issuance and Initial Distribution of Debt Securities
Although the European Union (EU) has implemented initiatives and common rules regarding securities settlement, no similar integration initiatives have been proposed for the issuance and initial distribution of debt securities. For this reason, the EU does not function as a single market given that issuers of euro debt instruments still have to use multiple and non-harmonised channels and procedures. A harmonised European framework for the issuance and initial distribution of debt securities or the establishment of a new European market infrastructure service is widely considered to create a deep and liquid single market for debt instruments. Although such paradigm shift promises significant improvements compared with the existing debt issuance and distribution landscape, a hasty and poorly-designed public intervention would risk distorting the market, thereby increasing complexity and leading to more fragmentation.
Forgiven But Not Forgotten: Emerging-Market Credit Spreads Following Debt Relief - [Zhuolu Gao, Mikkel V Hauerberg, David Lando, Aleksander Tetzlaff] - [Financial Analysis]
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Preview: Forgiven But Not Forgotten: Emerging-Market Credit Spreads Following Debt Relief
We examine yield spreads of government debt issues from countries that have received large-scale debt relief through the Heavily Indebted Poor Countries (HIPC) program and the Multilateral Debt Relief Initiative (MDRI). Using data from more than 3,000 bonds issues and after controlling for macroeconomic, political, and geographical factors, we find that HIPC governments pay an average yield spread premium of close to 1.5\% on USD-denominated and non-USD-denominated bonds compared to similar countries which have not received relief. Despite the extent of the relief and the significant conditions attached to it, the market perception is that relieved countries remain riskier.
Banks’ Portfolio of Government Debt and Sovereign Risk - [António Afonso, José Alves, Sofia Monteiro] - [Financial Analysis]
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Preview: Banks’ Portfolio of Government Debt and Sovereign Risk
We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
Sovereign Debt Speculation: A Necessary Restraint Justified by a Concern for Debt Sustainability - [Justin Vanderschuren] - [Institutional and Organizational Framework]
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Preview: Sovereign Debt Speculation: A Necessary Restraint Justified by a Concern for Debt Sustainability
The actions of funds speculating in sovereign debt, frequently nicknamed “vulture funds”, are often roundly criticized. These funds purchase distressed debts on the secondary market at reduced prices and then seek payment in court at face value plus interest and fees. Although their actions are legally justified, so-called “vulture funds” are vilified due to the negative impact of their activities on sovereign debtors and their population. While there is a strong demand for regulating sovereign debt speculation, various solutions already exist but are, in many ways, insufficient. This article argues for the adoption of a tailored regulation of the speculative phenomenon by the United States. The article explains that sovereign debt sustainability is the only standard that can ensure the balance between the rights of creditors and the proper functioning of debtor states. This argument justifies the regulation of speculative activities as well as the magnitude that this regulation should take.
Local Banks' Stabilization Role: Does Local Government Debt Matter? - [Zheng Xue] - [Subnational Debt]
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Preview: Local Banks' Stabilization Role: Does Local Government Debt Matter?
This study investigates the stabilizing role of small and medium-sized local banks and assesses whether high local government debt levels hinder this role. Using bank-level data for all provinces in China, 2015–2021, we find that the lending behavior of small and medium-sized banks is countercyclical when located in provinces with low levels of local government debt but procyclical when located in provinces with high levels of local government debt, particularly during busts. This finding suggests that high levels of local government debt hinder the stabilizing role of small and medium-sized banks, exacerbating regional economic volatility.
State and Local Government Financial Fundamentals - [Oliver Giesecke, Seamus Duffy] - [Institutional and Organizational Framework]
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The Stanford Municipal Finance Dashboard is an original resource to provide financial fundamentals for all state governments and the 500 largest local governments in the United States. We summarize the financial position of public entities by several important financial metrics similar to the practice in the corporate finance context. These metrics have been largely missing for public entities. We close this gap by publishing these indicators and provide an aggregate financial strength score for all state governments and the largest local governments in the United States. This document describes the methodology that we use.
Comparing CDS Spreads of EU Sovereigns in the Progress of the Global Financial Crisis and the Eurozone Debt Crisis - [Yongwoong Lee, Kisung Yang] - [Financial Analysis]
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Preview: Comparing CDS Spreads of EU Sovereigns in the Progress of the Global Financial Crisis and the Eurozone Debt Crisis
This study investigates how differently have the CDS spreads of EMU core, EMU periphery, and non-EMU economies evolved in the progress of the Global Financial Crisis (GFC) and the Eurozone Debt Crisis (EDC). We employ AR-X-GARCH-copula models to analyze the heterogeneous patterns in the movements of the CDS spreads across the three groups and two crises. We find that the value of EUR among the common determinants has asymmetric effect on the EMU periphery group and the others. Furthermore, only Greece and Ireland experiences structural changes in the conditional means after controlling for the common determinants. In terms of conditional volatility, the three groups exhibit similar structural increases during the GFC, however, the EMU periphery group shows obviously larger increment than the others in the EDC period. As a result of the dependence analysis, we find (EMU core, EMU core) and (non-EMU, non-EMU) pairs generally experience structural increase in both the Gaussian and tail dependences during the two crises. However, (EMU periphery, EMU periphery) overall exhibits no or structural decrease in dependence. Lastly, the asymmetry in dependence becomes more skewed to the lower tail for the GFC period whereas it stays similar for the EDC period, in general.
On Debt and Climate - [Patrick Bolton, Lee C. Buchheit, Mitu Gulati, Ugo Panizza, Beatrice Weder di Mauro, Jeromin Zettelmeyer] - [Debt Policy]
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This article discusses the links between climate and debt sustainability by focusing on how climate mitigation and adaptation are paid for, and who pays for it. This requires thinking about instruments such as sovereign bonds, carbon credits, conditional official grants and debt relief from both public and private sources. The article discusses the role of green bonds, carbon offsets, grants and debt relief. Among these solutions, no single instrument appears to be right for all countries or at all times. To move forward, we make six proposals and policy recommendations that can jointly address climate change and debt sustainability.
The Role of Institutions on Public Debt: A Quantile Regression Approach - [Arusha V. Cooray,İbrahim Özmen] - [Macroeconomic Analysis]
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The unprecedented rise in debt levels across countries has given rise to the role of institutions on public debt. This study examines the impact of institutions on government debt in a sample of 54 EU and non-EU economies, covering the 2010 to 2020 period. Employing the Logistic Quantile Regression (LQR) method, we examine whether institutions affect countries equally, when they have low debt levels (are at the lower end of the distribution) compared to countries with high debt levels (are at the higher end of the distribution). Our results indicate that the effect of institutions varies across the distribution of debt. The results suggest that government effectiveness, the control of corruption and the rule of law has a significant impact on countries with low levels of debt in EU nations. In non-EU nations in contrast, government effectiveness, the rule of law and the regulatory quality has the highest impact when debt levels are around their median level. Several robustness checks confirm our findings.
Money and the Public Debt: Treasury Market Liquidity as a Legal Phenomenon - [Lev Menand, Josh Younger] - [Debt Policy]
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Preview: Money and the Public Debt: Treasury Market Liquidity as a Legal Phenomenon
The market for U.S. government debt (Treasuries) forms the bedrock of the global financial system. The ability of investors to sell Treasuries quickly, cheaply, and at scale has led to an assumption, in many places enshrined in law, that Treasuries are nearly equivalent to cash. Yet in recent years Treasury market liquidity has evaporated on several occasions and, in 2020, the market’s near collapse led to the most aggressive central bank intervention in history.
This Article pieces together what went wrong and offers a new account of the relationship between money issue and debt issue as mechanisms of public finance. It argues that a high degree of convertibility between Treasuries and cash generally requires intermediaries that can augment the money supply, absorbing sales by expanding their balance sheets on both sides. The historical depth of the Treasury market was in large part the result of a concerted effort by policymakers to nurture and support such balance sheet capacity at a collection of nonbank broker-dealers. In 2008, the ability of these intermediaries to augment the money supply became impaired as investors lost confidence in their money-like liabilities (known as repos). Subsequent changes to market structure pushed substantial Treasury dealing further beyond the bank regulatory perimeter, leaving public finance increasingly dependent on high-frequency traders and hedge funds—”shadow dealers.” The near money issued by these intermediaries proved highly unstable in 2020. Policy makers are now focused on reforming Treasury market structure so that Treasuries remain the world’s most liquid asset class. Successful reform likely requires a legal framework that, among other things, supports elastic intermediation capacity through balance sheets that can expand and contract as needed to meet market needs.
BinD: A Model of Growth, Climate Change, and Debt Sustainability - [Ozlem Omer, Nepomuk Dunz, Asjad Naqvi] - [Economic Policies]
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Climate change disproportionately impacts capital and output in low- and middle-income countries (LMICs). Limited fiscal space and high dependence on capital good imports further curtail their ability to make timely climate-resilient investments. In this paper we present a demand-driven model that is supply-side constrained due to insufficient build up of production capacity. Calibrating the model to Fiji, we evaluate growth pathways for three climate futures – 2C, 3C, and 4C global warming by the end of the century. We evaluate the role of a public climate fund to enable partial recovery that is financed through four different schemes - debt-led recovery, higher tax on households, higher taxes on capitalists, and unconditional grants from the rest of the world. Recovery is possible in the 2C scenario, but the 3C and 4C scenarios increasingly face higher investment costs in the face of lower growth and saving rates. In the 4C scenario, even the most generous unconditional grants scheme fails to prevent the downward spiral of hitting capacity constraints despite an initial boost to output. These insights underscore the need for effective and equitable domestic climate policies and affordable finance and compensation to support sustainable development in vulnerable countries.
Industrial Policy and Sovereign Debt - [Matthias Goldmann] - [Institutional and Organizational Framework]
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The purpose of this paper is, first, to identify and distinguish the different trajectories of the relationship between industrial policy and sovereign debt, tapping on historical examples from Germany and Egypt. It then provides a brief analysis and legal assessment of each identified trajectory, namely the debt implications of foreign investments made in pursuance of industrial policies; and the implications of the sovereign debt regime on industrial policies in debtor states. The paper concludes with some recommendations for international institutions and courts.
A New Fiscal Framework for Resource-Rich Countries - [Luc Eyraud, William Gbohoui, Paolo Mauro - IMF] - [Financial Analysis]
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This paper revisits the debate on the design of fiscal rules in resource-rich countries. Its main objective is to assess alternative systems of rules against their policy objectives, while taking into account country characteristics. One of the contributions of the paper is to propose fiscal frameworks that are centered around the principle of insurance against shocks and less reliant on estimating precisely resource wealth, which tends to be highly volatile.
Reports
Share: The inversion of the yield curve and its information content in the euro area and the United States
Preview: The inversion of the yield curve and its information content in the euro area and the United States
Following the rapid rise in short-term interest rates since last year, the risk-free yield curves in the euro area and the United States show the steepest inversion in decades. The spread between the 10-year and the 2-year Overnight Index Swap (OIS) rates in the euro area stood at -0.4 percentage points in September, after rebounding in recent months from -0.8 percentage points, which was its lowest level since 1992 […]
Report on Public Finances in EMU 2022 - [European Commission]
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According to the Commission 2023 spring forecast, euro area real GDP is projected to grow at 1.1% and 1.6% in 2023 and 2024 respectively, after a substantial growth of 3.5% in 2022. But core inflation remains high at 5.8% in 2023, after peaking at 8.4% in 2022. The fiscal positions are expected to improve in 2023 and, especially, in 2024, largely reflecting the phasing out of energy support measures. The euro area general government deficit is projected to drop to 3.2% and 2.4% of GDP in 2023 and 2024, respectively, following 3.6% of GDP in 2022. The euro area debt-to-GDP ratio decreased to around 93% in 2022 from its historical peak of almost 100% of GDP in 2020 and is projected to further decline to around 90% by 2024. […]
European Secondary Bond Market Data - [ICMA Secondary Market Practices Committee]
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This report provides an overview of European trading activity for both the sovereign bond and corporate bond markets, comparing our latest findings with past performances since January 2022. Specific changes and trends relative to past reports can be summarised as follows: Traded volume for sovereign bonds in H1 2023 has increased by 2.7% compared to H1 2022, representing 53.8% of total traded volume in the full year of 2022; In both sovereign and corporate bonds, a decrease in average and median trade sizes is observed; The average trade size decrease varied between 10% and 37%, depending on the issuing country for sovereign bonds; For corporate bonds, the average trade size decrease from H1 2022 to H1 2023 ranges between 3% and 19%, depending on currency; The only subclass where the average trade size seems to have increased were US issued sovereign debt, as well as USD denominated non sovereign debt; In terms of number of trades, it is worth noting that trade counts have increased 21% for sovereign bonds and 8% on the credit side; In both segments, bonds are mainly traded via systematic internalisers (SI) (59% in sovereign bonds and 56% in corporate bonds, respectively). We also analysed traded notional and trade count across different trade size bins, observing an increase in the proportion of SI trades as trade size increases; Contrary to what has been observed on the sovereign bonds side, we could identify an increase in D2C transactions on the credit side, compared to H1, 2022.
The Worst Ever Global Debt Crisis - New Data From Debt Service Watch - [Development Finance International ]
Share: The Worst Ever Global Debt Crisis - New Data From Debt Service Watch
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This policy briefing, based on the new Debt Service Watch database, shows that the citizens of the Global South now face the worst debt crisis since global records began. Debt service1 is absorbing an average 38% of budget revenue and 30% of spending across the South, rising to 54% of revenue and 40% of spending in Africa. Spread across all continents, 35 countries are paying more than half of revenue, and 54 over one third. These figures are more than twice the levels faced by low-income countries before HIPC and MDRI debt relief; and slightly higher than those paid by LAC countries before the Brady Plan in the 1980s. More crucially, debt is pushing aside key spending to confront social and environmental crises. Debt service equals combined total spending on education, health, social protection and climate, and exceeds it by 50% in Africa. It is 2.5 times education spending, 4 times health spending, and 11 times social protection spending. Developing countries need another major round of debt cancellation. Yet current debt relief deals are failing to reduce service sharply to free spending room for the SDGs: on average, the most recent debt restructuring deals are leaving debt service at an average 48% of revenue over the next 3-5 years. The international community must take urgent steps to reduce debt service much more sharply, through enhanced debt relief and reduced borrowing costs. Only with these can it provide its fair share of funding for the Secretary-General’s proposed SDG Stimulus, and rescue the Sustainable Development Goals.
An International Lender of Last Resort and the International Financial Markets - [Catherine L. Mann ]
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Increasingly the IMF is being called an international lender of last resort. What does it mean to be a lender of last resort (LOLR)? What supporting structures are required to effectively play that role? Central banks in national financial systems can (and some do) intervene to support some participants in the financial system in times of crisis. What can we learn from national LOLR experience for the occasions under which a LOLR might take action, the instruments the LOLR might use, and what supporting structures might be necessary for a LOLR to be effective in balancing the risks of financial crisis against the risks of moral hazard. If indeed the IMF is being called upon to act as an international LOLR, does it have (or can it be given) the instruments and supporting structures which appear to be necessary in the national context? […]
Share: World Economic Outlook, October 2023
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The latest World Economic Outlook reports signs that policy tightening is starting to cool activity despite core inflation proving persistent. Risks are more balanced as banking sector stress has receded, but they remain tilted to the downside. Monetary policy should stay the course to bring inflation to target, while fiscal consolidation is needed to tackle soaring debts. Structural reforms are crucial to revive medium-term growth prospects amid constrained policy space.
Share: Regional Economic Outlook, Sub-Saharan Africa, October 2023
Preview: Regional Economic Outlook, Sub-Saharan Africa, October 2023
Still emerging from the COVID-19 pandemic, countries in sub-Saharan Africa have been hit by a sluggish global economy, worldwide inflation, high borrowing costs, and a cost-of-living crisis. In many cases, inflation is still too high, borrowing costs are still elevated, exchange-rate pressures persist, and political instability is an ongoing concern. To ensure that the coming rebound is more than just a transitory glimpse of sunshine, it is important for authorities to guard against a premature relaxation of stabilization policies, while also focusing on reforms to both claw back lost ground from the four-year crisis and also to create new space to address the region’s pressing development needs.
Share: Global Financial Stability Report, October 2023 - Financial and Climate Policies for a High-Interest-Rate Era
Preview: Global Financial Stability Report, October 2023 - Financial and Climate Policies for a High-Interest-Rate Era
Chapter 1 assesses that risks to global growth are skewed to the downside, similar to the assessment in the April 2023 Global Financial Stability Report. Cracks in the financial system may turn into worrisome fault lines should a soft landing of the global economy hoped for by market participants does not materialize. Chapter 2 homes in on the global banking system, providing a fresh assessment of vulnerabilities in a higher-for-longer environment, using an enhanced global stress test and a set of newly developed market-based indicators. In response to the vulnerabilities that are uncovered, enhancements to supervisory practices and tightening of regulatory standards are proposed. Chapter 3 notes that a broad mix of policies is required to unlock the private capital necessary to cover climate mitigation investment needs in emerging market and developing economies.
Trade And Development Report 2023 - [UNCTAD]
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UNCTAD’s Trade and Development Report 2023 warns that the global economy is stalling, with growth slowing in most regions compared with last year and only a few countries bucking the trend. It says the global economy is at a crossroads, where divergent growth paths, widening inequalities, growing market concentration and mounting debt burdens cast shadows on the future. The prospect of meeting the Sustainable Development Goals (SDGs) by 2030 is fading as a combination of rising interest rates, weakening currencies and slowing export growth squeezes the fiscal space needed for governments to fight climate change and provide for their people. The report calls for a change in policy direction – including by leading central banks – and accompanying institutional reforms promised during the COVID-19 crisis to avert a lost decade. It urges global financial reforms, more pragmatic policies to tackle inflation, inequality and sovereign debt distress, and stronger oversight of key markets.The report proposes actions to get the global economy moving in the right direction by using a balanced policy mix of fiscal, monetary and supply-side measures to achieve financial stability, boost productive investment and create better jobs.
Economic Bulletin Issue 6, 2023 - [European Central Bank]
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Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council decided at its meeting on 14 September 2023 to raise the three key ECB interest rates by 25 basis points. The rate increase reflects the Governing Council’s assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The September 2023 ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. […]
South Asia Development Update October 2023 - [World Bank]
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At just under 6 percent, South Asia is expected to grow faster than any other developing country region this year—but slower than its pre-pandemic pace and not fast enough to meet its development goals. The region faces many risks to this outlook, including due to fragile fiscal positions created by high government debt. Countries need to urgently manage and reduce fiscal risks, and over the longer term, accelerate growth and create jobs in a sustainable manner. The global clean energy transition is an opportunity for the region to lift productivity, cut pollution, reduce reliance on fuel imports, and create jobs. To capitalize on this, countries need to encourage the adoption of advanced energy-efficient technology and take steps to protect vulnerable workers impacted by labor market shifts.
Share: Overview of the Canadian Derivatives Market
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While the Canadian derivatives market encompasses a relatively small share of global turnover, it plays an important role in the Canadian economy. Derivatives provide an effective means for companies to manage the risks arising from fluctuations in interest rates, commodity and equity prices and FX rates, as well as enabling investors to express a market view, diversify their portfolio and enhance returns. Derivatives also facilitate transparency, price discovery and market efficiency. […]
World Bank’s Fall 2023 Regional Economic updates - [The World Bank]
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Find below the latest regional economic updates including the latest growth forecasts for East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa. These reports are issued biannually ahead of the World Bank Group Spring and Annual Meetings. […]
A Handbook on Public Debt Transparency - [Commonwealth Secretariat’s Debt Management Unit]
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A Handbook on Public Debt Transparency, produced by the Commonwealth Secretariat’s Debt Management Unit, provides a practical blueprint to assist debt managers and stakeholders to improve transparency in debt management operations through the implementation of a wide range of activities. The Handbook provides information on key debt transparency issues relevant to both developing and advanced economies based on the Commonwealth Secretariat’s long history of providing technical assistance and capacity-building to debt managers, senior officials and policy-makers in member countries and for stakeholders. The Commonwealth Secretariat’s debt management programme strives to promote sound practices in debt management, including the provisioning of a debt management system since 1983. The Commonwealth Secretariat Debt Recording and Management System (CS-DRMS), an integrated tool for recording, analysing and reporting public sector debt, has evolved into the flagship Commonwealth Meridian, a comprehensive solution that promotes effective and proactive debt management. […]
Mobilizing Resources through Municipal Bonds:Experiences from Developed and Developing Countries - [Manoj Sharma, Junkyu Lee, William Streeter]
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This report recommends some strategies to promote greater issuance and acceptance of municipal bonds in four Developing Member Countries across Asia: India, Viet Nam, the Philippines, and Indonesia. All four countries have a significant number of large population centers with sizable infrastructure needs, an adequate legal and regulatory framework for issuing and servicing municipal bonds (referred to herein as the internal ecosystem for municipal bonds), and a developing bond market infrastructure, including regulatory frameworks for bond issuance, financial disclosure, public debt ratings, as well as stock exchanges for the listing and trading of bonds (referred to herein as the external ecosystem for municipal bonds).
Asian Development Outlook (ADO) July 2023: Robust Growth with Moderating Inflation - [Asian Development Bank]
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Exports from developing Asia weakened in the first quarter of 2023 as global demand slowed. However, consumption and investment are forecast to boost aggregate regional growth to 4.8% in 2023, as earlier forecast, with the projection for 2024 revised down only marginally to 4.7%.
Margins, debt capacity, and systemic risk - [Sirio Aramonte, Andreas Schrimpf, Hyun Song Shin]
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We lay out a stylised accounting framework for system-wide debt capacity, when debt serves both as an obligation of the borrower, and also as the collateral pledged by the lender to secure additional funding. Our focus is on fluctuations in margins and leverage. Changes in margin (and the corresponding fluctuations in leverage) are reflected in the fluctuations in the balance sheet size of market participants and in the financial system's broader risk-taking capacity. A sharp increase in margins, especially after a protracted period of thin margins, will tighten financial conditions for the whole system. We use our framework to provide a perspective on the liquidity imbalances that rocked financial markets in March 2020, amid the uncertainty of the Covid-19 pandemic. […]
How is the positive equity-bond correlation impacting asset allocation? - [Christian Mayes]
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The low equity-government bond correlation seen since the turn of the century has formed the bedrock of the 60/40 multi-asset portfolio model. However, the correlation has grown increasingly positive in recent times – FTSE Russell analysis shows the correlation coefficient between the FTSE Global All-World equity index and the FTSE World Government Bond Index reached a 10-year peak of 0.86 at the end of March, while the mean coefficient for the decade since 2013 stands at 0.26. So what does this upwards trend mean for multi-asset portfolios? Generally speaking, the stock-bond correlation turns more positive during periods where markets are more concerned over inflation than growth. […]
Share: A potential path for alleviating Currency Risk in Emerging Markets Green Bonds
Preview: A potential path for alleviating Currency Risk in Emerging Markets Green Bonds
A large gap exists between the financing needed for the energy transition and what is being invested. Green bonds are flourishing as one of the main sources to close this financing gap, with over $2.5 trillion issued globally thus far. However, emerging market and developing economies (EMDEs) haven’t fully capitalized on the growth of this asset class: the share of EMDE (excluding China) green bonds denominated in local currencies within the total green bond universe remains minuscule. While some EMDE issuers can sell a bond denominated in dollars and hedge by swapping the dollar exposure into the local currency of the underlying projects, the cost of doing so is usually prohibitive. This report, part of the Financing the Energy Transition initiative at the Center on Global Energy Policy at Columbia University SIPA, adds to ongoing discussions of how to encourage a greater flow of green financing from international investors to emerging economies […]
Revitalizing the global architecture for sovereign-debt restructuring: The New York State Legislature steps in - [Dr. Brahima S. Coulibaly, Wafa Abedin]
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Unsustainable sovereign-debt levels in the developing world threaten to erase several decades of hard-fought progress on development agendas. According to the International Monetary Fund (IMF), an estimated 50 percent of developing countries are in active debt distress or at high risk of debt distress. The costs of debt service now exceed outlays on education and health in several countries. The COVID-19 pandemic and Russia-Ukraine war are the latest in a series of shocks that have contributed to the recent buildup of debt since developing countries benefited from debt forgiveness under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI). The world’s deteriorated fiscal situation and unsustainable-debt outlook were top of mind as heads of state and finance leaders gathered in June 2023 in Paris for the Summit for a New Global Financing Pact to rethink the global financial system […]