International Sovereign Bonds Research Articles

What broke the pearl of the Indian ocean? The causes of the Sri Lankan economic crisis and its policy implications

Sri Lanka unilaterally defaulted on its external debt in April 2022, exposing its long-standing economic and financial vulnerabilities and igniting a series of inter-related multiple economic crises—fiscal, debt, currency, inflation, and balance of payments—as well as a vast socio-political upheaval. This paper analyses the economic crisis and its various dimensions to understand the sources of the crisis and draw policy implications. The role of fiscal balances and public debt in the crisis, along with debt sustainability, international sovereign bonds, liquidity crisis, and currency collapse, are analyzed. The root cause of Sri Lanka’s economic crisis was running persistent and large fiscal deficits, which were increasingly financed by unsustainable public debt, particularly foreign commercial borrowings. A substantial reduction and reprofiling of debt through restructuring of both domestic and foreign debt to ensure debt sustainability, meaningful fiscal policy reforms anchored by revenue increases and expenditure rationalization to reduce fiscal deficits, and deep growth-enhancing structural reforms are necessary for medium-term rescue and recovery and long-term growth and stability of Sri Lanka. The findings provide important policy lessons for other emerging markets and middle-income economies.

An Alternative View of Sri Lanka's Debt Crisis

ABSTRACTThis article questions the validity of widely promulgated claims that Sri Lanka's debt crisis is the result of a combination of Chinese debt diplomacy and economic mismanagement in the form of fiscal and monetary excesses. The authors argue that if Sri Lanka has fallen into any kind of debt trap, it is an international sovereign bond debt trap. They further argue that the fundamental cause of the country's debt crisis is the failure of successive Sri Lankan administrations to transition towards an export‐oriented manufacturing economy focused on producing increasingly technologically sophisticated manufactured products, and lay the blame for this failure on a combination of external and domestic forces operating in tandem with one another. Since the remedial action taken by the Sri Lankan government in the context of an extended fund facility arrangement with the International Monetary Fund is premised on the contention that the source of the crisis is the protracted fiscal and monetary excesses of successive Sri Lankan administrations, this action is unlikely to offer a permanent solution to Sri Lanka's debt problem — just as similar attempts to remedy previous debt and currency crises have failed.

A Comparative Analysis of External Debt in the East African Community Countries

Borrowing to finance public infrastructure has pushed debt levels to record highs within the East African Community (EAC) countries. Total external debt stock grew by 333.38 percent between 1970 and 2020. The rise in external debt exceeded growth in GDP and exports in all the countries except for the Democratic Republic of Congo between 2010 and 2020. The situation could have been worse had it not been for a massive external debt cancellation by the international community under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) programmes that benefitted all the EAC countries except Kenya. Virtually all the countries are increasingly borrowing more long-term than short-term external loans. Multilateral and official bilateral creditors continue to be the major financiers in all the countries even though these countries are gradually diversifying their sources of borrowing. All the EAC countries except Burundi had publicly guaranteed private sector external debt from commercial banks between 2010 and 2020. Three of the countries, Kenya, Tanzania and Rwanda, had nonguaranteed private sector external debt during the period. Two countries, Kenya and Rwanda, have joined a fast growing number of African countries that are issuing international sovereign bonds. The EAC countries are in a vulnerable position, with public external debt already at elevated levels. Trends in some of the external debt ratios including debt-to GDP, debt-to-exports, and debt service-to-exports ratios suggest that these countries could face challenges in servicing their external debts and meeting other foreign exchange obligations. High levels of external debt seem to have led to a vicious cycle of debt. Even after benefitting from the HIPC and MDRI debt relief programmes, the countries are once again facing high debt ratios. In light of the above findings, governments of the EAC countries should: look for improved terms on new loans; restructure external commercial loans that have heavy maturities and high interest rates; continue to diversify sources of external financing to reduce high dependency on expensive loans; make concerted efforts to increase concessional public external debt; explore non-debt creating financing options for public investments such as Public Private Partnerships; and look into refinancing expensive debt with debt on more favourable terms. Keywords : External debt, multilateral and bilateral debt, publicly guaranteed debt, external debt indicators, vicious cycle of debt DOI: 10.7176/JESD/14-4-01 Publication date: February 28 th 2023

ХАЛҚАРО СУВЕРЕН ОБЛИГАЦИЯЛАР БОЗОРИ ТАҲЛИЛИ

This article reflects the scientific opinions of economists on the essence, importance, characteristics and other aspects of sovereign bonds in the analysis of the global sovereign bonds market. Moreover, the analysis of the operations related to the sovereign bonds issued to the local and international market of the developed G7 countries and Asian countries is presented in the international sovereign bonds market. In these analyses, the practices of countries neighboring Uzbekistan are also studied. On the basis of the performed analysis, relevant scientific conclusions and proposals are given on the international sovereign bonds market.

Sovereign Bond Market Shock Spillover Over Different Maturities: A Journey from Normal to Covid-19 Period

With application of Diebold and Yilmaz’s (Int J Forecast 28(1):57–66, 2012) spillover approach, we examine shock spillover in international sovereign bond yields over short, medium, and long term maturities for major eight economies. By scrutinizing the data from 1st January 2013 to 12th November 2020, we explored that irrespective of pre-covid-19 or covid-19 period, shock spillover in bond yields across markets are much stronger over long and medium maturities relative to short-term maturity. Moreover, shock spillover of bond yields has amplified manifold during Covid-19, irrespective of their maturities compared to pre-Covid-19 period. The magnitude of shock spillovers remains low with short-term maturity. Assessing the relationship between international sovereign bond markets (SBMs) contributes to our understanding and is also crucial to the investors (both domestic and foreign) in investing in SBMs.

Ties that bind and blur: financialization and the evolution of sovereign debt as private contract.

The rich scholarship on the politics and finance of sovereign debt tends to take for granted debt’s most basic form: as a private contract. Nevertheless, legal challenges have been central to the contemporary evolution of sovereign debt dynamics thanks to litigating strategies rendered possible by — mostly standard — contractual stipulations in international sovereign bonds. By using a debt-as-private-contract lens, the paper highlights how exposed sovereign debtors present themselves to these global transactions, how foreign sovereign bond contracts anchor otherwise footloose finance in particular jurisdictions, and how contractual changes sparked by outlier cases of protracted litigation or recent turbulence in debt exchanges have been key to global efforts to reform debt governance around market-based parameters. The legal battle between Argentina and its holdout creditors in US courts is analyzed here to illustrate these dynamics given its significance in sparking contractual revisions. Ultimately, it is clear that credit and contract are inextricably linked. Contractual evolution is revealing of the legal risks taken on by sovereign debtors and their creditors in private markets. The cost of debt hence may go beyond relatively predictable financial calculations.

Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?

This paper analyzes the effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs, using secondary-market bond yield spreads. Our findings indicate that inclusion of enhanced CACs, introduced in August 2014, is associated with lower borrowing costs for both noninvestment-grade and investment-grade issuers. These results suggest that market participants do not associate the use of CACs and enhanced CACs with borrowers’ moral hazard, but instead consider their implied benefits of an orderly and efficient debt resolution process in case of restructuring.

Does economic policy uncertainty matter to explain connectedness within the international sovereign bond yields?

This paper examines the determinants of the dynamic connectedness between sovereign bond yields in a sample of G7 countries. In addition to the common macroeconomic factors, we focus on the impact of Economic Policy Uncertainty (EPU) on the dynamic connectedness patterns between bond yields. To this end, we first examine the full-sample connectedness among the seven bond yields and examine various features of connectedness using a measure recently proposed by Diebold and Yilmaz (Int J Forecast 28(1):57-66, 2012). To examine the determinants of the dynamic connectedness, we use the panel data model to consider the dynamic net connectedness between the considered bond yields as the endogenous variable. Overall, being the transmitter or recipient of spillovers appears to have independent and different influences depending on each of the two types of sovereign bond yields. Also, the findings support the idea that EPU can create an environment likely to exacerbate the transmission of spillover shocks between two-year sovereign bond yields. Conversely, on the whole, EPU does not appear to affect the connectedness of thirty-year sovereign bond yields in various bond markets. The findings also reveal the significant impacts of real output on how shocks across countries manifest in different ways.

Term spreads and the COVID-19 pandemic: Evidence from international sovereign bond markets

We explore the impact of the COVID-19 pandemic on the term structure of interest rates. Using data from developed and emerging countries, we demonstrate that the expansion of the disease significantly affects sovereign bond markets. The growth of confirmed cases significantly widens the term spreads of government bonds. The effect is independent of government policy and monetary responses to COVID-19 and robust to many considerations.

Volatility in International Sovereign Bond Markets: The Role of Government Policy Responses to the COVID-19 Pandemic

Effective government policies may reduce uncertainty in sovereign bond markets. Can policy responses help to curb bond market volatility during the COVID-19 pandemic? To answer this, we examine data from 31 developed and emerging markets for the coronavirus outbreak in 2020. We demonstrate that government interventions substantially reduce local sovereign bond volatility. The effect is mainly driven by economic support policies; the containment and closure regulations and health system interventions play no major role.

Volatility in International Sovereign Bond Markets: The role of government policy responses to the COVID-19 pandemic

Effective government policies may reduce uncertainty in sovereign bond markets. Can policy responses help to curb bond market volatility during the COVID-19 pandemic? To answer this, we examine data from 31 developed and emerging markets during the coronavirus outbreak in 2020. We demonstrate that government interventions substantially reduce local sovereign bond volatility. The effect is mainly driven by economic support policies; the containment and closure regulations and health system interventions play no major role.

Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?

This paper analyzes the effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs, using secondary-market bond yield spreads. Our findings indicate that inclusion of enhanced CACs, introduced in August 2014, is associated with lower borrowing costs for both noninvestment-grade and investment-grade issuers. These results suggest that market participants do not associate the use of CACs and enhanced CACs with borrowers’ moral hazard, but instead consider their implied benefits of an orderly and efficient debt resolution process in case of restructuring.

Unlawfully-Issued Sovereign Debt

In 2016, its economy in shambles and looking to defer payment on its debts, the Venezuelan government of Nicolas Maduro proposed a multi-billion dollar debt swap to holders of bonds issued by the government’s crown jewel, state-owned oil company Petroleos de Venezuela S.A. (“PDVSA”). A new government now challenges that bond issuance, arguing it was unlawful under Venezuelan law. Bondholders counter that this does not matter—that PDVSA freed itself of any borrowing limits by agreeing to a choice-of-law clause designating New York law. The dispute over the PDVSA 2020 bonds implicates a common problem. Sovereign nations borrow under constraints imposed by their own laws. Loans that violate these constraints may be deemed invalid. Does an international bond—i.e., one expressly made subject to the law of a different jurisdiction—protect investors against that risk? The answer depends on the text of the loan’s choice-of-law clause, as interpreted against the backdrop of the forum’s rules for resolving conflict of laws problems. We show that the choice-of-law clauses in many international sovereign bonds—especially when issued under New York law—use language that may expose investors to greater risk. We document the frequent use of “carve outs” that could be interpreted to require the application of the sovereign’s local law to a wide range of issues. If interpreted in this way, these clauses materially reduce the protection ostensibly offered by an international bond. We explain why we think a narrower interpretation is more appropriate.

Term Spreads and the COVID-19 Pandemic: Evidence from International Sovereign Bond Markets

We explore the impact of the COVID-19 pandemic on the term structure of interest rates. Using data from developed and emerging countries, we demonstrate that the expansion of the disease significantly affects sovereign bond markets. The growth of confirmed cases significantly widens the term spreads of government bonds. The effect is independent of government policy and monetary responses to COVID-19 and robust to many considerations.

Restructuring Argentina’s Sovereign Debts – Navigating the Legal Labyrinth

On Feb. 19, 2020, the IMF declared that Argentina’s debts were no longer sustainable and called upon bondholders to help resolve the crisis. A schedule for the restructuring of Argentina’s external debt has been announced by the Argentina Ministry of Finance on Jan. 29, 2020. According to the Ministry, Argentina plans to launch a debt restructuring offer in the second week of March and execute the offer by the end of March. This short essay provides an overview of the intricate challenges that Argentina would be facing in a potential restructuring of its sovereign debt obligations, with a focus on the legal aspects. After mapping the respective debt instruments, which include domestic debt, international sovereign bonds, as well as loans from international financial institutions, I turn to the key legal obstacles when it comes to the (unilateral) restructuring. The paper posits that the most significant legal risks are likely to occur with respect to international bonds and disruptive legal actions taken by their holders. Uncooperative creditors may engage in holdout tactics with the goal of obtaining a better settlement than their peers by refusing to settle and ultimately launching litigation proceedings in foreign courts. The latest type of Argentine bonds (Macri bonds) include modern, fully-aggregated, single-limb Collective Action Clauses (CACs), which are powerful in ameliorating such holdout inefficiencies. However, several older bonds (Kirchner bonds) feature an outdated model of CACs, and generally afford stronger enforcement rights to bondholders. Unsurprisingly, creditor holding Kirchner bonds have already formed committees to leverage their negotiation position. Another related difficulty that this paper reviews arises from the requirement in Argentina's newer (Macri) bonds that a restructuring offer must be uniformly applicable for all affected series of bonds. Given the two different sets of bond contracts involved, this requirement may lead to complex transactional and design questions. Finally, with respect to the interpretation of the pari passu clause included in Argentina's bond prospectuses, the essay argues that a recent decision by the Southern District Court of New York significantly reduced the risks of specialized holdouts attacking a majority-approved debt workout. To be sure, modern sovereign bond restructurings rest on the basic premise of bondholder democracy. In other words, as long as a sufficient majority of creditors accepts a restructuring offer, most legal obstacles can be overcome. However, the entrance of specialized distressed-debt managers the market suggests that some investors will gamble for a better deal, or try to leverage their contractual rights against the country in a classic holdout manner. While Argentina certainly finds itself in a legally superior position compared to its last debt crisis, the country will soon have to sail into choppy legal seas where all sorts of hazards lurk - some of which the country is all too familiar with.

Testing for multi-fractality and efficiency in selected sovereign bond markets: a multi-fractal detrended moving average (MF-DMA) analysis

This study examines the multifractality and relative efficiency in sovereign bond markets, using the multifractal detrended moving average (MF-DMA) approach to quantify the degree of multifractality in the international sovereign bond yields. We use the daily values of the 2-year maturity government bond yields for 12 countries between 2003 and 2014 for empirical analysis. Our results document that all bond markets show multifractal characteristics in various levels. High degree of multifractality is seen in the Spanish, Portuguese and Italian bond markets while low multifractality features belong to the Canadian and the US bond market. The source of multifractality is mainly due to the structure of the bond markets where the recent Eurozone debt crisis has manifested itself as extreme observations.

Third Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts

The IMF Executive Board endorsed in October 2014 the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.1 Specifically, the Executive Board endorsed the use of (i) a modified pari passu provision that explicitly excludes the obligation to effect ratable payments, and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” aggregated voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure, and a series-by-series voting procedure.2 Directors supported an active role for the IMF in promoting the inclusion of these clauses in international sovereign bonds.3 The IMFC and the G20 further called on the IMF to promote the use of such clauses and report on their inclusion. Since that time, the IMF has published periodic progress reports on inclusion of the enhanced clauses.4 These reports found that since the Executive Board’s endorsement, substantial progress had been made in incorporating the enhanced clauses, with approximately 85 percent of new international sovereign bond issuances since October 2014 (in nominal principal amount) including such clauses. The reports also found that there was no observable market impact on inclusion of the enhanced clauses. However, the reports noted that the outstanding stock without the enhanced clauses remained significant, with issuers showing little appetite for liability management exercises to accelerate the turnover. This paper provides a further update on the inclusion of the enhanced clauses and on the outstanding stock of international sovereign bonds as of September 30, 2017. Section II reports on the inclusion of these enhanced provisions, finding that the vast majority of issuers are including these clauses, with only a few countries standing out against the market trend. Section II also provides an update on the outstanding stock, indicating that while the percentage of the outstanding stock with the enhanced clauses is increasing, a significant percentage of the stock still does not and little action has been taken by issuers to increase the rate of turnover. Section III briefly reports on the use of different bond structures, and Section IV describes the staff’s ongoing outreach efforts and next steps.

Debt relief initiatives 20 years on and implications of the new development finance landscape

ABSTRACTHaving been on the verge of falling off development practitioners and analysts’ radar for nearly a decade, concerns about the ability to meet external obligations are rising, especially in those developing countries that benefited from debt relief in the past decade. This article reviews these issues by taking stock of some of the achievements of the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) to date and by reflecting on the extent to which the ‘new’ debt-creating development finance flows – emerging lenders, international sovereign bonds, and public–private partnerships – may jeopardise debt sustainability and the results achieved so far.

Africa’s next debt crisis: regulatory dilemmas and radical insights

ABSTRACTA new African debt crisis appears imminent, which will have new features because several countries have recently introduced international sovereign bonds. Organisations such as the World Bank and the African Development Bank increasingly acknowledge the risk of such a crisis, but continue to prescribe debt-management strategies based on liberalisation and government spending cuts. Insights drawn from liberals favouring government regulation identify an alternative policy direction, while Marxist scholars raise serious concerns about the merits and implications of the bonds altogether. These alternative approaches have the potential to enrich inter-governmental policy discussions and potentially avert the looming new African debt crisis.

Solving the pari passu puzzle: the market still knows best

As a result of the Argentine sovereign debt crisis and ensuing holdout litigation saga, the pari passu (or ranking) clause became a source of great consternation in the international sovereign bond market. Specifically, Judge Griesa’s holding that Argentina had violated the pari passu clause by refusing to pay creditors who had not participated in the nation’s earlier debt exchanges, and accompanying requirement that Argentina had to pay those holdout bondholders, led to uncertainty in the market regarding the leverage holdouts could exercise in sovereign debt restructurings going forward. Concern was expressed over the ability of sovereigns to succeed with voluntary exchange offers premised on the threat that the restructuring sovereign would default on payments due to non-participating bondholders. This article evaluates the impact of the court’s decision in the Argentine litigation to date and discusses the adoption of improved ranking clauses and collective action voting clauses in recent issuances of sovereign debt in the effort to bring greater certainty to market participants and facilitate efficient restructurings in the future without the need for extra-contractual restructuring mechanisms and remedies.