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Debt Management in Uncertain Times Debt Management in Uncertain Times Proceedings of the first Public Debt Management Network Conference, held in Paris on September 4-5, 2019 1 Debt Management in Uncertain Times Proceedings of the first Public Debt Management Network Conference, held in Paris on September 4-5, 2019 DEBT MANAGEMENT IN UNCERTAIN TIMES 2 Debt Management in Uncertain Times Ministero dell’Economia e delle Finanze, Rome – Italy – October 2020 ISBN 978-88-945665-0-5 DEBT MANAGEMENT IN UNCERTAIN TIMES 3 Index Foreword ................................................................................................................................................. 5 Debt Management in Uncertain Times: a background paper - M. Coşkun Cangöz, Eric Bouyé .................... 7 Public Debt Reduction in Uncertain Times – With a View to Europe - Pier Carlo Padoan ........................ 17 Implementing a Sovereign Asset and Liability Management Framework in Emerging Market Countries - Thordur Jonasson, Michael G. Papaioannou ...................................................................... 24 Managing South Africa's Exposure to Eskom: How to Evaluate the Credit Risk from the Sovereign Guarantees? - Fritz Florian Bachmair, Cigdem Aslan, Mkhulu Maseko ................................................................ 40 Linking Policy to Outcomes: a Simple Framework for Debt Maturity Management - Mattia Landoni, Winthrop T. Smith, Christopher Cameron ......................................................................................................... 59 An Integrated Approach to Cost-Risk Analysis in Public Debt Management - Massimo Bernaschi, Roberto Morea, Lucio Sarno, Fabrizio Tesseri, Federica Verani, Davide Vergni ..................................................................... 81 Optimal Composition of Sovereign Debt: An Adaptation from Modern Portfolio Theory - H.Hakan Yavuz, Umut Gölbaşı .......................................................................................................................................... 107 Specialists’ Incentives on Government Bond Markets: Lessons from the Italian Case - Filippo Mormando, Luciano Greco .......................................................................................................................................... 119 Transmission of Monetary Policy through the Wealth Channel in Brazil: does Public Debt Matter? - Jose Luiz Rossi Júnior, Marina Delmondes de Carvalho Rossi, Daniel Carvalho Cunha ........... 147 Variable Rate Debt to Ensure the Government Budget against Macroeconomic Shocks - Gerhard Fenz, Johannes Holler ................................................................................................................................ 168 How Should Public Debt Management Institutions Develop Medium-Term Issuance Strategies? An optimal debt portfolio model - Dávid Tran András Bebes ......................................................................... 187 The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018 - Mattia Osvaldo Picarelli, Aitor Erce, Xu Jiang ............................................................................................................ 213 DEBT MANAGEMENT IN UNCERTAIN TIMES 4 5 Foreword Public Debt Management (PDM) Network, an initiative fostered by the OECD, the Italian Treasury and the World Bank held a Public Debt Management Conference in Paris on September 4-5, 2019. Given the rising government debt globally and growing contingent liabilities, yet limited comprehensive and analytical discussions on the topic, the Conference addressed the dynamics of debt accumulation, the approaches to improve quantitative and analytical public debt management in the context of a shifting macroeconomic, geopolitical, regulatory, and technological environment. Nineteen papers were presented in eight sessions, focusing on the areas of sovereign asset and liability management, modeling the cost and risk tradeoff in public debt management, approaches to debt sustainability and government securities market. The main topics debated during the Conference are briefly discussed in the following to provide an in-depth background and a perspective going forward, given the COVID- 19 pandemic increased vulnerabilities of government debt to external shocks. The Conference Proceedings involve the keynote speech delivered by Professor Pier Carlo Padoan, Member of the Italian Parliament and former OECD DSG and Chief Economist, and ten papers by the authors who agreed to participate in the proceedings. The order of the proceedings is parallel to the sequence of the presentations held in the Conference. Here is a short description of the papers. Jonasson and Papaioannou provide a guideline and highlights of good practices for achieving optimal results based on lessons from countries that have adopted an SALM approach. Fritz Bachmair et al. emphasize a stepwise credit risk assessment approach and illustrate its application in South Africa. Landoni et al. suggest a deterministic framework to link the maturity distribution of new issues, with the outcomes, based on the long-run maturity distribution of outstanding issues that prevails if this policy is held indefinitely. Bernaschi et al. present a probabilistic model to compare cost-risk performance of proposed government bond portfolios relying on cost-risk frontier and the credit value adjustment. Yavuz and Golbasi suggest a stochastic cost-at-risk model to generate optimal composition of the sovereign debt and the underlying borrowing strategies. Greco and Mormando investigate if the ranking system effectively affect market makers in their quoting decisions and the liquidity conditions of order books. Junior et al. explore the transmission of the monetary policy through the wealth channel in Brazil, using a structural Bayesian model. Fenz and Holler present a static framework for the optimal debt portfolio hedge analyzing the potential of inflation-indexed and short-term interest-rate-linked debt to hedge government budgets against macroeconomic demand, supply and monetary policy shocks. Bebes and Tran propose a multi-objective optimal portfolio model, to find Pareto-optimal compositions of financing that satisfy the main objectives of public debt and construct financing compositions. Picarelli et al. discuss the introduction of mandatory two-limb CACs in euro area sovereign bonds issued under domestic law and evaluate the price impact of these provisions. 6 The Conference Organization Team included: Fatos Koc, OECD Caroline Lam, OECD Coşkun Cangöz, World Bank François Lefebvre, World Bank Eric Bouyé, World Bank Maria Margarita Sanchez, World Bank Davide Iacovoni, Italian Ministry of Economy and Finance Fabio Vittorini, Italian Ministry of Economy and Finance Daniela Santacroce, Italian Ministry of Economy and Finance The Conference Organization Team is grateful to Professor Pier Carlo Padoan, Member of the Italian Parliament and former OECD DSG and Chief Economist, for kindly accepting to deliver his keynote speech to the Conference participants The Conference Organization Team is grateful to the papers’ selection panel members: For the Italian Ministry of Economy and Finance: Maria Cannata, Member of the Experts Council and former Head of Public Debt Directorate at the Italian Treasury Carlo Favero, Professor of Economics at Bocconi University Michele Manna, Deputy Head of Banknotes Directorate and former Head of Public Debt Division at Bank of Italy Alessandro Missale, Professor at the University of Milan For the OECD: Fatos Koc, Head of Public Debt Management Unit, OECD Peter Hoeller, Head of Division, OECD Sebastian Schich, Economist, OECD Sean Dougherty, Senior Advisor, OECD For the World Bank M. Coşkun Cangöz, Head of Debt and Risk Management François Lefebvre, Senior Financial Officer Eric Bouyé, Head, Asset Allocation and Quantitative Strategies / Lead Investment Officer Anderson Caputo Silva, Practice Manager in the Finance, Competitiveness & Innovation Global Practice Doerte Doemeland, Practice Manager for Global Macro and Debt Analytics in the Macroeconomics, Trade and Investment (MTI) Global Practice Quoted affiliations and role descriptions as of the 2019 Conference date. 7 Debt Management in Uncertain Times: a background paper M. Coşkun Cangöz1 and Eric Bouyé2 A brief overview of public debt accumulation According to classical public finance theory, government budgets are balanced, and deficit is temporary (Feldstein, 1985). However, over the last century, government debt accumulated mostly because of the sharp drops in government revenue, provision of stimulus and financial sector support, yet primary balance was the dominant factor in debt reduction (Abbas et al., 2011). Central government debt-to-gross domestic product (GDP) of advanced economies steadily increased since mid-1970s due to the mix of aging of the societies, expansion of social welfare state, and stationary growth of population (Reinhart and Rogoff 2013). Figure 1. Government Debt/GDP Following the global financial crisis, level of central government debt in advanced 140,0 economies reached to another peak (Figure 120,0 1). Until mid-1990s the trend of central 100,0 government debt in emerging economies 80,0 was parallel to advanced countries, then it 60,0 was deleveraged for around a decade and 40,0 started to increase after the 2008 crisis. The 20,0 reasons for debt accumulation in emerging 0,0 countries differ across different regions and income groups. 1970 1973 1976 1979 1982 1985 1988 1991
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