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Pension Privatization and Country Risk

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Author Info

  • Alfredo Cuevas
  • Maria Gonzalez
  • Arnoldo López-Marmolejo
  • Davide Lombardo

Abstract

This paper explores how privatizing a pension system can affect sovereign credit risk. For this purpose, it analyzes the importance that rating agencies give to implicit pension debt (IPD) in their assessments of sovereign creditworthiness. We find that rating agencies generally do not seem to give much weight to IPD, focusing instead on explicit public debt. However, by channeling pension contributions away from the government and creating a deficit of resources to cover the current pension liabilities during the reform''s transition period, a pension privatization reform may transform IPD into explicit public debt, adversely affecting a sovereign''s perceived creditworthiness, thus increasing its risk premium. In this light, accompanying pension reform with efforts to offset its transition costs through fiscal adjustment would help preserve a country''s credit rating.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/195.

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Length: 25
Date of creation: 01 Aug 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/195

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Related research

Keywords: Credit risk; Public debt; Privatization; Economic models; pension; pension reform; current account; current account balance; paygo; pension system; inflation factor; government debt; debt intolerance; pension debt; pension reforms; pension liabilities; debt sustainability; pension contributions; implicit pension debt; pension scheme; pensions; pension benefits; pensioners; pension systems; public pension; pension obligations; contingent liability; contingent liabilities; public sector debt; debt management capacity; reserve bank; unfunded pension liabilities; pension funding; pension system reform; defined-contribution pension; actual debt; currency mismatches; public pension systems; defined-benefit pension; retirement; pension fund; debt management; debt stock; current pension; pension payments; unfunded pension; pension schemes; future income; public pension system; external debt; contribution pension; mandatory savings; pension funds; funded pension; benefit pension; contribution pension scheme;

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  1. Juan Carlos Conesa & Carlos Garriga, 2004. "Optimal Design of Social Security Reforms," Working Papers 140, Barcelona Graduate School of Economics.
  2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  3. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  4. Holzmann, Robert & Palacios, Robert & Zviniene, Asta, 2004. "Implicit pension debt: issues, measurement and scope in international perspective," Social Protection Discussion Papers 30153, The World Bank.
  5. Gustman, Alan L. & Steinmeier, Thomas L., 1999. "Effects of pensions on savings: analysis with data from the health and retirement study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 271-324, June.
  6. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  7. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-24, September.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  10. Baek, In-Mee & Bandopadhyaya, Arindam & Du, Chan, 2005. "Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 533-548, June.
  11. Andrew Powell & Juan F. Martinez S., 2008. "On Emerging Economy Sovereign Spreads and Ratings," Research Department Publications 4565, Inter-American Development Bank, Research Department.
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