S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy, Malin Hu
There has been renewed interest in sovereign debt since the Global Crisis, but relatively little attention has been paid to its composition. Sovereign debt can differ in terms of the currency it is denominated in, its maturity, its marketability, and who holds it – and these characteristics matter for debt sustainability. This column presents evidence from a new dataset on the composition of sovereign debt over the past century in 13 advanced economies.
Academic, policy, and market interest in sovereign debt has spiked since the 2008 Global Crisis. Researchers have sought to place the post-Crisis synchronised build-up in sovereign debt ratios in advanced economies within a longer-term/historical context, drawing comparisons with debt surges during the Great Depression, debt consolidations in the aftermath of World War II, and more.A bird’s eye view of key debt composition ratios over time offers some intuitive patterns.
Around 90% of advanced economies’ debt is and was denominated in local currency. Still, six of the 13 countries saw the foreign currency debt share rise above 50% at some point – post-WWI France and Italy are notable cases in point.
The share of local currency medium-to-long-term debt in total debt has averaged 68% over the sample (or three-fourths of local currency debt) and exhibits an intuitive pattern – governments issued longer-dated paper in good times and compensated for the higher riskiness of their debts during bad times by shortening issuance maturities. Cross-country variation in the maturity structure of debt mirrors differences in, inter alia, a country’s vulnerability to fiscal/military crises, reserve currency status, and debt management preferences.
Before WWI, almost all central government debt was issued in the form of marketable securities. The share of such securities declined during post-WWI consolidations, before falling precipitously (to as low as around 55%) during and after WWII – an era characterised by financial repression and captive financial markets. The share recovered starting in the mid-1970s and now stands at about 80%.
The holder profile data reveals an average share in debt for national central banks of about 10%,3 and almost double that for domestic commercial banks. Moreover, the two shares appear to be substitutes for much of the 1920–1970 period – central banks were clearly picking up the tab from commercial banks (and other holders) around/after WWII. Both shares fell in tandem after the 1970s, as just non-resident participation in sovereign debt markets soared. The non-residents’ share of debt increased from 5% to 35% over 1970–2011, and reflected a number of underlying factors: financial innovation and globalisation; stronger sovereign debt management; independent central banks committed to low inflation; the introduction of the euro, which led to the de facto elimination of currency risk within the Eurozone; and the accumulation of ‘safe’ foreign sovereign securities by emerging Asian economies, especially China.
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