The role of debt profile vulnerabilities in sovereign distress

ABSTRACT

Sovereign debt distress has raised difficult issues in terms of debt sustainability in the past, but it has been associated not only with medium-term debt dynamics, but also with various dimensions of the debt profile that have typically built vulnerabilities over time. Vulnerabilities associated with the public debt structure and liquidity may play an important role in derailing a stable debt trajectory and thus contribute to debt distress. Financial developments may also contribute to the building in sovereign debt vulnerabilities, as deterioration in financial stability indicators can affect the balance sheet of the national treasury. Based on the experience during 37 debt distress events in countries with market access between 1993 and 2010, this article identifies early warning indicators of sovereign debt distress and defines thresholds – for the whole sample and for different regions – at which these latter have been associated with distress in the past. This approach allows us to assess indicators on an individual basis, and to develop a composite indicator of debt vulnerabilities as well.

KEYWORDS:

• Sovereign debt profile
• public debt sustainability
• debt distress
• liquidity
• debt maturity
• debt currency composition

JEL CLASSIFICATION:

• H63
• G15

Acknowledgements

We thank, without implicating, Said Bakhache, Larry Brainard, Dominique Desruelle, Julien Hartley, Douglas Hostland, Allison Holland, Herve Joly, Kadima Kalonji, Francois Painchaud, Paolo Mauro, Andrzej Raczko and Carmen Reinhart for useful comments and suggestions. We also thank participants of the IMF seminar. All remaining errors are ours. This article represents only the authors’ views and not those of the International Monetary Fund, its Executive Board or its Management.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For a comprehensive survey of sovereign debt and default, see Panizza, Sturzenegger, and Zettelmeyer (2009).

² See Calvo (1988), Detragiache and Spilimbergo (2001), Detragiache and Spilimbergo (2004), Jeanne (2000, 2005, 2009), Manasse, Roubini, and Schimmelpfennig (2003), Manasse and Roubini (2009), Moody’s Investors Service (2010) and Reinhart and Rogoff (2009).

³ Table 1 also shows that there are a number of indicators – notably the average maturity of debt and gross international reserves as per cent of short-term debt – that issue a significant number of good signals (between 80% and 90% of the potential good signals) but are not very efficient. This is related to the fact that they are very noisy, i.e. they issue too many ‘bad signals’.