Why Greece isn’t like U.S. revealed in bonds
The vulnerability of economies to sovereign debt crisis may depend on who’s holding their bonds.
That’s a signal from a new index designed by International Monetary Fund economists. It seeks to show which advanced economies have the flightiest sources of investment and so are most at risk of sudden capital outflows.
The gauge, published in a working paper this month, runs from zero to 100. A higher score means that the country is more prone to a sudden buyers’ strike from investors. A country with a zero rating would have all its debt held by the domestic central bank, while a 100 reading means all the country’s debt would be owned by foreign investors such as insurance companies and hedge funds, excluding governments and banks.
Created by IMF economists Serkan Arslanalp and Takahiro Tsuda, the index is based on a dataset from 24 major advanced economies and $42 trillion of sovereign debt holdings from 2004 to 2011.
The measure suggested the euro-area economies that received bailouts exhibited high risk of outflows as early as 2010. Greece was rated at 75 in the fourth quarter of 2009, when it could still borrow in the market. With results of 39 and 44 respectively at the end of 2011, Spain and Italy are less threatened because of the high share of debt in the hands of domestic banks, the report said.
With scores of less than 25 at the end of 2011, Australia, Japan, Switzerland and the U.S. were among those identified as having safer sources of finance. Germany scored 40 a year ago.
The index can explain some classic “puzzles” of why certain countries can sustain much higher debts without market pressure, said Arslanalp and Tsuda.
For example, while Japan has a debt equivalent to more than 200 percent of gross domestic product, a lot of it is held domestically and so is less at risk of flight, they said, while the U.K., Germany and U.S. may be in a similar class.
The study also found a rising share of foreign investors in sovereign debt markets even after $400 billion of withdrawals from the euro region’s most strained nations from mid-2010 to the end of 2011.
Banks are also increasingly exposed to their own government’s debt. Sixty-nine percent of euro-area bank’s regional debt holdings were of their own sovereign issues at the end of 2011, up from 57 percent at the end of 2007. In Greece, Italy and Spain, the ratio was closer to 100 percent.
The results “show that large funding gaps may arise in a number of countries in case of severe foreign outflows, requiring large absorption by domestic banks,” said Arslanalp and Tsuda.
[Bloomberg]
