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Pension Privatization and Country Risk

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

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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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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  1. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  2. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Effects of Pensions on Saving: Analysis with Data from the Health and Retirement Study," NBER Working Papers 6681, National Bureau of Economic Research, Inc.
  3. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  4. 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.
  5. Martin Feldstein & Stephanie Seligman, 1980. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc.
  6. Andrew Powell & Juan Francisco Martínez, 2008. "On Emerging Economy Sovereign Spreads and Ratings," IDB Publications (Working Papers) 6735, Inter-American Development Bank.
  7. 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.
  8. Juan Carlos Conesa & carlos Carriga, 2004. "Optimal Design of Social Security Reforms," UFAE and IAE Working Papers 642.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  9. Nadeem Ul Haque & Manmohan S. Kumar & Nelson Mark & Donald J. Mathieson, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 688-724, December.
  10. 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.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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