Debt Managers’ Stockholm Syndrome Symptoms
As European governments individually and collectively scramble to overcome liquidity, rollover and other risks associated with classic debt crises, the IMF lauded emerging market lessons in a regular roundup of compliance with the so-called best practice Stockholm Principles. In particular capital inflows have extended local currency maturities over the past decade, causing “less severe stress” in the immediate post-2008 crunch. The average sovereign bond tenor is 4 years, and floating and foreign currency-linked versions account for under 20 percent of the amount outstanding. Non-resident holdings have grown from one-quarter to one-third of the total, as net credit rating changes have been overwhelmingly positive in contrast with advanced economies. The paper urges low-income countries to embrace such steps as they become increasingly eligible and equipped for commercial borrowing. In the Lehman bankruptcy wake foreign buyers “abruptly departed,” compelling issuers like Hungary, Poland and Mexico to resort to shorter-term and adjustable placement features. In Central Europe the primary dealer auction process was also modified, syndicates were supplemental agents, and calendars were accelerated. Liability management operations were mounted to smooth repayment and yield curve characteristics, and cross-border investor diversification was emphasized with outreach to Asia and the Middle East. Over-reliance on outside appetite should be avoided however as put into “sharp focus” by current euro area emergency facilities to Greece, Ireland and Portugal. The entire portfolio should be subject to mutually-reinforcing sovereign and financial sector balance sheet worst-case scenarios as outlined in guidelines dating from the 1990s Asian financial crisis. A low rollover profile is welcome and has distinguished UK requirements from continental Europe. In cases like Chile and Russia national wealth funds can be tapped for additional liquidity, and retail and institutional investors can be further targeted through smaller lots and innovations including inflation-linked paper.
Brazil and Mexico had managed to lengthen maturities and also offer a range of exchange-traded and over-the-counter derivatives for hedging prior to the 2009 squeeze. Turkey’s finance ministry has actively run debt exchanges, and even irregular sponsors like the Philippines have recently completed large longer-dated swap exercises. The analysis concludes however that the proposed Basle III regulatory changes beyond capital for liquidity and leverage ratios could “create problems” in countries where debt markets are thin especially in relation to banking size. Repos and secondary activity could be constrained, and financial institution warehousing of safe instruments could interfere with normal lending patterns. Before the euro-zone crisis worsened the BIS estimated that over EUR 1.5 trillion would be needed to meet the new standards that no longer hold sympathy for ailing banks as well as nonbanks which could be hostage.
