Download Growth Indexed Bonds

Growth-indexed Bonds
Advantages
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Avoid defaults and collateral damage
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Avoid pro-cyclical fiscal policy
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Promote international risk sharing
Eduardo Borensztein
IMF, April 2003
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:
•
r* = 7 percent
• g* = average growth rate of previous 20 years
• 50 percent of government debt is growth-indexed
Define Fiscal saving =
reduction in annual interest payments thanks to
the growth-indexed bonds
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
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Too risky?
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Too complicated?
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Growth is well-understood and followed
Misreporting of GDP data
•
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Already exposed to GDP. Less default risk
Incentives not strong. Could be audited
Moral Hazard
Political resistance to “pay insurance”
Precedents
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Brady 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 Contingent Bond?
•
Room for various liquid contingent bonds?
• Commodity-linked
•
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Good proxy?
Not under control of the sovereign
More market base, except for long maturities
Domestic Currency
•
•
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Different but correlated—could provide similar degree
of insurance
Growth-indexed domestic-currency debt
Risks of capital controls, manipulation
How Will It Happen?
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History evolves randomly, eg, Banks vs
Bonds in sovereign finance, inflationindexed bonds
Externalities and coordination problems,
official intervention
Debt Restructuring: time for innovation?
Role for IFIs?