Financial stress and sovereign debt composition

ABSTRACT

Using a panel of 13 advanced economies for the period 1980–2012, we find that periods of impaired financial intermediation mainly accrue to maturity mismatches in sovereign debt. Thus, a higher (lower) share of short-term (medium and long-term) debt leads to an increase in the financial stress index. From a policy perspective, our work suggests that debt management policies translated into longer average maturities of sovereign debt not only reduce the expected debt servicing cost, but also mitigate strains in the financial sector.

KEYWORDS:

• Financial stress
• sovereign debt composition
• currency
• maturity
• holders
• marketability

JEL CLASSIFICATION:

• H63
• H12
• G01
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For an overview of the existence of structural breaks and nonlinearity in the public debt of the US and UK, see Jawadi and Sousa (2013).

² For an assessment of the impact of fiscal consolidation on the likelihood of financial reforms, see Agnello et al. (2015a). Agnello et al. (2015b) analyse the extent to which debt crises boost this type of structural adjustments.

³ We thank the authors for sharing their extended data set on financial stress indices with us.

⁴ Sousa (2012) shows that the wealth-to-income ratio predicts future government bond yields, even after accounting for episodes of financial stress.

⁵ The countries included in our sample are: Australia, Belgium, Canada, France, Germany, Italy, Ireland, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the United States. The choice of this set of countries is dictated by the availability of data on the sovereign debt composition.

Additional information

Funding

Castro and Sousa acknowledge that this work has been financed by Operational Programme for Competitiveness Factors - COMPETE and by National Funds through the FCT - Portuguese Foundation for Science and Technology within the remit of the project FCOMP-01-0124-FEDER-037268 [PEst-C/EGE/UI3182/2013].