Sovereign Asset Research Articles

Sovereign Asset and Liability Management (SALM) and Efficient Debt Management: A Comprehensive Review of Short-Run Dynamics, Long-Run Relationships, and Asymmetric Effects

Sovereign Asset and Liability Management (SALM) and Efficient Debt Management: A Comprehensive Review of Short-Run Dynamics, Long-Run Relationships, and Asymmetric Effects

Legal Basis of Sanctions against Russia and Asset Confiscation

"This study provides an in-depth examination of the legal bases for current asset freezes in the European Union (EU) and the United States (US), and how these differ from confiscations of Russian state assets. It explores the evolving political deliberations that have led to new goals of making reparations to Ukraine, which has suffered extensive damage estimated at more than 600 billion euros as a result of Russia’s invasion. The primary focus of this study is on the potential confiscation of frozen state assets of Russia as a means to achieve reparations. Western governments have initiated comprehensive assessments of avenues to perform permanent asset seizures, with the overarching goal of strengthening the tracing, identification, freezing and management of assets as preliminary steps for potential confiscation. The study discusses the legislative pitfalls associated with sovereign asset confiscation, its challenges and limitations. It highlights how the principle of sovereign equality of states can hinder such actions, protecting the assets of Russia’s central bank from court proceedings and execution in another state. Despite Russia’s actions contravening the fundamental norms of international law, interpretations of customary international law maintain Russia’s immunity from legal proceedings in foreign courts. Therefore, it can be concluded that there are no legal bases for the expropriation of Russian sovereign assets. Keywords: confiscation of assets, Russian assets, reparations, legal considerations, International law, sanctions, sovereign equality."

Sovereign Asset and Liability Management (SALM): Perspective of Pandemic COVID-19 Outbreak in Oecd Countries, Including Poland

Abstract The COVID-19 pandemic is global and affects all countries in the world. The difference in the financial impact assessment of its outbreak concerns, inter alia, the state of preparation of the public sector in the previous period. The article assumes that countries which coordinated the structure of sovereign assets and liabilities before 2020 were less exposed to the negative effects of financial risks resulting from the COVID-19 pandemic. The study uses data and methodology of the International Monetary Fund and the authors’ measures dedicated to the public sector to assess the sovereign asset and liability management (SALM). As part of the results, the negative value of net worth and the national net welfare index for the studied countries, including Poland in the period before the pandemic crisis, were indicated. In addition, the level of the loans mismatch on the public balance sheet and the scale of the increase in financial risk in the first year of COVID-19 are presented. Conclusions of research make it possible to assess the impact of COVID-19 on Sovereign Asset and Liability Management.

Policy Brief: Design Choices in Sovereign Asset Management Companies

After a large economic shock, states often transfer a portion of privately held debt to the public balance sheet. The mechanism used for this transfer differs, depending on the nature and cause of the shock—mobilization expenditures, after war breaks out; relief spending, after storms or other disasters strike; transfer payments, after financial stress. This policy brief reviews one structure used to achieve these public-private debt transfers, the sovereign asset management company (AMC). It offers a new way to distinguish sovereign AMCs along four design pillars: priority, autonomy, authority, and patience. Based on those pillars, it separates sovereign AMCs into four archetypes. Finally, in a summary matrix, it compares 14 sovereign AMCs across a broader set of design choices. The views expressed in this article are the author’s alone and do not necessarily reflect the views of the Federal Reserve Board or the United States government.

A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities

A sovereign asset and liability management framework for managing foreign currency risk requires a joint analysis of (i) the external financial liabilities resulting from a country’s sovereign debt and (ii) the foreign exchange assets of its central bank. The study recommends a practical approach that includes analysis of the foreign exchange positions of central bank reserves and central government debt portfolios and optimization of the net position. A quantitative method is employed for efficient management of foreign exchange risk. The model is tested for seven countries (Albania, Ghana, North Macedonia, South Africa, the Republic of Korea, Tunisia, and Uruguay).

The European Monetary Union after COVID-19: Towards Fiscal Integration Aligned with Monetary Policy

Within the Economic and Monetary Union (EMU) of Europe the responsibility for the single monetary policy lies with the European Central Bank (ECB). By contrast, economic policies remained national and must therefore be coordinated to ensure the proper functioning of EMU. A central government that could have taken measures to reduce the burden on monetary policy to stabilise the eurozone in the more challenging economic and financial circumstances since 2008 was and still is missing.This paper argues that euro area governments could build on the cooperative model of Europe’s economic response to the COVID-19 pandemic to establish a permanent fiscal framework alongside monetary policy that is more similar to those found in other currency areas. First, they could create a central fiscal capacity to ensure a euro area economic policy stance that is consistent with the orientation of monetary policy. Second, member countries could introduce a safe sovereign asset for the eurozone in order to anchor financial integration and facilitate the implementation of monetary policy. Third, euro area governments could commit when necessary to recapitalise their NCB and (indirectly) the ECB to underpin the credibility of large central bank balance-sheet operations.Taking these three steps towards fiscal integration aligned with monetary policy and in full respect of the ECB’s political independence would reduce systemic risks and strengthen confidence in the euro.

Sovereign Asset and Liability Management in Emerging Market Countries

This paper provides an overview of the strategic and operational issues as well as institutional challenges, related to the implementation of the Sovereign Asset and Liability Management (SALM) approach. Application of an SALM framework allows the authorities to identify and monitor sovereign exposure mismatches; increase resilience to foreign currency and interest rate risks; and thus, strengthen financial stability; and implement more cost-effective management of the public-sector debt. The analysis is based on emerging market (EM) countries and illustrated by the experience of Uruguay, using data as of end-2017.

Sovereign Asset and Liability Management in Emerging Market Countries: The Case of Uruguay

This paper provides an overview of the strategic and operational issues as well as institutional challenges, related to the implementation of the Sovereign Asset and Liability Management (SALM) approach. Application of an SALM framework allows the authorities to identify and monitor sovereign exposure mismatches; increase resilience to foreign currency and interest rate risks; and thus, strengthen financial stability; and implement more cost-effective management of the public-sector debt. The analysis is based on emerging market (EM) countries and illustrated by the experience of Uruguay, using data as of end-2017.

Commodity-based Sovereign Wealth Funds: Managing Financial Flows in the Context of the Sovereign Balance Sheet

Commodity-based sovereign wealth funds (SWFs) have been at a crossroads following the recent fall in commodity prices. This paper provides a framework for commodity-based SWF management, focusing on stabilization and savings funds, by (i) examining macrofiscal linkages for SWFs; (ii) presenting an integrated sovereign asset and liability management (SALM) approach to SWF management; and (iii) applying this framework to a scenario where assets are being accumulated and to a scenario where the SWF is drawn on to cover a financing gap due to lower commodity prices.

Addressing the Safety Trilemma: A Safe Sovereign Asset for the Eurozone

At the 25th anniversary of the Maastricht Treaty, this paper reviews the merits of introducing a safe sovereign asset for the eurozone. The triple euro area crisis showed the costly consequences of ignoring the ‘safety trilemma’. Keeping a national safe sovereign asset (the German bund) as the cornerstone of the financial system is incompatible with having free capital mobility and maintaining economic and financial stability in a monetary union. The euro area needs a single safe sovereign asset. However, eurobonds are only foreseen after full fiscal integration. To address the safety trilemma member countries must therefore act as the joint sovereign behind the euro and choose from two options. First, they could establish a credible multipolar system of safe national sovereign assets. For this purpose, they could all issue both senior and junior tranches of each national government bond in a proportion such that the expected safety of the senior tranche is the same across countries while the junior tranche would absorb any sovereign default risk. Additional issuance of national GDP-linked bonds could insure governments against a deep recession that might lead to a self-fulfilling default and thereby help to make the junior tranche less risky. The second option is that the member countries together produce a common safe sovereign asset for a truly integrated and stable monetary union by creating synthetic eurobonds comprising both a safe senior claim and a risky junior claim on a diversified portfolio of national government bonds. This appears a more effective solution to the safety trilemma – especially when euro area governments would also issue national GDP-linked bonds – but it requires flanking measures to control for moral hazard.

Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank?

New-style central banking in many advanced economies, involving the use of unconventional monetary policy instruments and forward guidance at the effective lower bound for interest rates, has raised questions about the appropriate role of fiscal policy – also in the euro area, where a fiscal counterpart to the European Central Bank (ECB) and the Eurosystem is missing. This paper considers three areas where euro area governments could act as the ‘joint sovereign’ behind the euro and support the ECB in its task of maintaining price stability, staying within the boundaries of the Maastricht Treaty. First, member countries could coordinate a growth-friendly aggregate economic policy mix that is supportive of the single monetary policy, with the help of a central fiscal capacity subject to common decision-making. Second, they could introduce a safe sovereign asset for the eurozone without assuming common liability in order to anchor financial integration and facilitate monetary policy implementation. Third, the significant benefits for the Eurosystem from a lower burden on monetary policy and a reduced exposure to sovereign risk could make it acceptable for euro area governments to indemnify it against potential large losses on its much expanded balance sheet. The fundamental solution, however, lies in advancing with fiscal integration to address the ‘institutional loneliness’ of the Eurosystem with full respect for its independent status.

Sovereign Risk and Asset and Liability Management—Conceptual Issues

Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic

Sovereign asset values and implications for the credit market

Using the contingent claim approach and market data on sovereign credit default swaps we assess the drivers of a country's risk perception. Deriving market-based asset values for a set of advanced economies we gain insights into the capital markets' perspectives on sovereign creditworthiness. We find the market-based asset values to be positively influenced by debt and to be an early risk indicator for economic developments. In a cross-section analysis we identify drivers of the economic risk of countries. Clustering the countries according to their debt to asset value ratios provides further insights into the market perceptions of sovereign credit risk. For example we find that the asset values of countries with higher ratios react to changes in the global equity market. Countries with a lower ratio react more to the political stability within the country.

Sovereign Risk and Asset and Liability Management—Conceptual Issues

Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic.

Financial Crisis, SWF Investing, and Implications for Financial Stability

AbstractThe recent global financial crisis has significantly affected sovereign wealth funds’ (SWFs’) financial performance and their investment activities. The crisis shed a new light on SWFs’ objectives and priorities. SWFs need to review critically their strategic asset allocation (SAA) within a sovereign asset and liability management (ALM) framework, and their assets should be analyzed over complete economic cycles including market turbulences. The crisis raises also the question of whether some of the underlying objectives of the Santiago Principles—maintaining a stable global financial system and maximizing financial returns—are perhaps conflicting. We argue that any conflict was from a wrong interpretation of the principles, not from the principles themselves. Ultimately, stable financial markets are in each SWF’s self interest, also from a narrow financial perspective. In this respect, financial stability and financial risk/return can be mutually reinforcing objectives rather than conflicting.

Sovereign Risk and Asset and Liability Management-Conceptual Issues

Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic.

Sovereign Risk and Asset and Liability Management: Conceptual Issues

Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic.