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Local debt expansion... vulnerability reduction? An assessment for six crises-prone countries

Author

Listed:
  • Paloma Acevedo

    () (Banco de España)

  • Enrique Alberola

    () (Banco de España)

  • Carmen Broto

    () (Banco de España)

Abstract

In recent years, for most emerging markets, public debt has decreased and its composition has evolved toward domestic currency. This progress is remarkable in terms of reduced financial vulnerability, which has been underpinned by favourable financing conditions and related deepening of local debt markets. In this paper, we assess the vulnerability reduction —conveyed in the ratio of total debt to GDP— achieved for six selected emerging economies, focusing on the importance of exchange rate evolution relative to the proactive policies that fiscal authorities have implemented to reduce the external exposure of debt. We first disentangle both components in the current structure of debt to show that proactive debt management has been the dominant factor in the reduction of the forex debt share. We then perform a stress test within a debt sustainability analysis framework. The results show that proactive debt management policies have —somehow paradoxically— entailed a short-term cost, preventing a more dramatic reduction in the debt to GDP ratio, but this is more than compensated by the benefits in terms of financial vulnerability reduction in the face of financial turbulences, reducing simultaneously the probability of such contingency.

Suggested Citation

  • Paloma Acevedo & Enrique Alberola & Carmen Broto, 2007. "Local debt expansion... vulnerability reduction? An assessment for six crises-prone countries," Working Papers 0733, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0733
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/07/Fic/dt0733e.pdf
    File Function: First version, October 2007
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    References listed on IDEAS

    as
    1. Márcio Gomes Pinto Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an Application to Brazilian Data," Textos para discussão 484, Department of Economics PUC-Rio (Brazil).
    2. Philippe D Karam & Douglas Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers 05/226, International Monetary Fund.
    3. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
    4. Laura Alfaro & Fabio Kanczuk, 2006. "Sovereign Debt: Indexation and Maturity," IDB Publications (Working Papers) 1578, Inter-American Development Bank.
    5. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
    6. Camilo E Tovar, 2005. "International government debt denominated in local currency: recent developments in Latin America," BIS Quarterly Review, Bank for International Settlements, December.
    7. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-3.
    8. Serge Jeanneau & Camilo E Tovar, 2006. "Domestic bond markets in Latin America: achievements and challenges," BIS Quarterly Review, Bank for International Settlements, June.
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    10. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Working Papers 0706, Banco de España;Working Papers Homepage.
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    Citations

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    Cited by:

    1. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Working Papers 0809, Banco de España;Working Papers Homepage.
    2. Daniel, L., 2008. "Foreign investors’ participation in emerging market economies’ domestic bond markets," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 12, pages 61-77, Summer.
    3. Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28.
    4. Isabel Argimón & Pablo Hernández de Cos, 2008. "The determinants of budget balances of the regional (Autonomous) governments," Working Papers 0803, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    external debt; local debt markets; financial crises; debt sustainability analysis;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance

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