Transcript GDP Indexed bonds

Growth-indexed Bonds
Advantages
•
Help avoid defaults and collateral damage
•
Avoid pro-cyclical fiscal policy
•
Promote international risk sharing
Eduardo Borensztein
IMF, January 2004
Precedents (Ideas)
•
Debt crisis of 1980s: Krugman (1988), Froot,
Scharfstein and Stein (1989). Index to exogenous
indicator (export prices) to maximize investment
•
Shiller (1992) securities. Perpetual GDP-indexed
claims for international risk diversification
•
More recently: Caballero (2001,2003): debt indexed
to indicators correlated to business cycle (“copper
bonds” for Chilean public and private debt).
Hausmann’s original sin.
Growth-indexed Bond—An Example
Consider a floating-rate bond with a coupon rate equal to:
Coupont  r *   gt  g *
with a minimum of zero.
Suppose that in 1990, for Mexico and Argentina:
• r* = 7 percent
• g* = average growth rate of previous 20 years
• 50 percent of government debt is growth-indexed
Mexico
Coupon Rates
Ave rage : 5.9%
10
8
6
4
2
0
1991
1993
1995
1997
1999
2001
FIscal Savings as % of GDP
Average: 0.2
2
1.5
1
0.5
0
-0.5
-1
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Argentina
Coupon Rates
Ave rage : 8.8%
20
15
10
5
0
1991
1993
1995
1997
1999
2001
Fiscal Savings as % of GDP
Average: 0.4
4
3
2
1
0
-1
-2
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Issues/Nonissues
•
Too risky?
•
•
Too complicated?
•
•
Already exposed to GDP. Less default risk
Growth is well-understood and followed
Misreporting of GDP data
•
Incentives not strong. Could be audited and
penalties set for delays or revisions
Argentina. Growth and EMBI Spread,
1993-2002
1993
Inverse of Spread
1997
2000
1998 1994
1999
1996
1995
2001
2002
-15.0
-10.0
-5.0
0.0
GDP Growth
5.0
10.0
Issues/Nonissues (cont.)
• Fixed income investors do not want an
equity-like instrument
• Specification could include a minimum
assured coupon
• Moral hazard
• Political resistance to pay insurance in
good times
Two Specifications of GrowthIndexed Bonds
14.0
12.0
"Symmetric" bond
(c*=7%, g*=3%)
Coupon
10.0
8.0
"Growth upside" bond
(c*=5%, g*=2%)
6.0
4.0
2.0
0.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Growth Rate
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
Precedents
•
•
•
•
•
Brady Bonds Value Recovery Rights
(VRRs)
GDP VRRs (Costa Rica, Bulgaria, Bosnia)
Ciudad de Buenos Aires
Options on US economic statistics
(Longitude-DB-GS)
Inflation-indexed bonds
Which Instrument?
•
•
Different risks, different contingencies. Is there room for
several different liquid markets for the same country?
Commodity-linked
•
•
•
•
Good proxy for growth and tax revenues?
Not under control of the sovereign
Already some market base exists, but only at short maturities
Domestic Currency Debt
•
•
•
Correlated with growth—also provides same type of insurance.
Could correlation change if debt is denominated in domestic
currency?
Growth-indexed domestic-currency debt
Risks of capital controls, exchange rate manipulation
How Will It Happen?
•
•
•
•
Financial innovation is somewhat random,
eg, Banks vs Bonds in sovereign finance,
inflation-indexed bonds
Externalities and coordination problems.
Official intervention
Debt Restructuring: time for innovation?
First mover problem? Groucho Marx
problem?
Introduction of Inflation Indexed Securities by Sovereigns
Australia
Canada
Finland
France
Greece
Iceland
Ireland
Italy
New Zealand
Norway
UK
USA
Period of Issue
1985-1988
19931991194519981997-
Average CPI Inflation Rate in Three
Years Prior to Introduction
(in percent)
8.4
3.8
4.6
n.a.
1.7
7.6
195519831983 3/
1977-1984
199419821975- 5/
19811997-
4.3
18.6
18.5
14.2
1.4
9.8
10.7
13.2
2.8
Indexed Public Debt Outstanding in 1999
in Percent of Total Govt
in million US$
Debt
----27,860
29.5
6,636
1.5
0.7
0.0
3,994
0.6
197
0.2
494 2/
260
0
n.a.
361
30
--55,288
57,014
11.5 2/
1.1
0.0
n.a.
2.3
0.1
--12.0
0.8
Sources: Campbell and Shiller (1996), Kopcke and Kimball (1999), Price (1997); Deacon, M. and A. Derry (1998), official
web sites of country authorities, and IMF desks.
1/ January 2003.
2/ February 2003.
3/ Only one issue of inflation-indexed bonds.
4/ From April 2000
5/ Index-linked national savings certificates.
Introduction of Inflation Indexed Securities by Sovereigns
Argentina
Brazil
Chile
Colombia
Czech Republic
Hungary
India
Israel
Mexico
Poland
Turkey
Period of Issue
1972-1989
19641956196719971995n.a.
195519891992-2000
1994-
Average CPI Inflation Rate in Three
Years Prior to Introduction
(in percent)
18.6
n.a.
39.6
13.7
9.3
23.2
n.a.
32.7
110.7
292.2
80.8
Indexed Public Debt Outstanding in 1999
in Percent of Total Govt
in million US$
Debt
0
0.0
45,291
19.6
14,960
62.0
4,949 1/
150
394
166
79,037
2,528
13.2 1/
1.7
3.0
0.2
80.2
8.4
0 4/
8,561
0.0 4/
24.3
Sources: Campbell and Shiller (1996), Kopcke and Kimball (1999), Price (1997); Deacon, M. and A. Derry (1998), official web
sites of country authorities, and IMF desks.
1/ January 2003.
2/ February 2003.
3/ Only one issue of inflation-indexed bonds.
4/ From April 2000
5/ Index-linked national savings certificates.