1
Debt Management and Financial Markets
FAD Professional Development SeminarWednesday, December 10, 2008
Allison Holland, Debt Management Advisor, Sovereign Asset & Liability Management Division, MCM
2
Out
line
of p
rese
ntat
ion
• Why
?•
Rece
nt tr
ends
• How
?•
Impa
ct o
f cris
is?
3
Wha
t is “
dom
estic
deb
t”?
•
Juris
dict
ion/
mar
ket o
f iss
uanc
e–
easie
st to
get
dat
a•
Cu
rren
cy–
very
rele
vant
to ri
sks
•
Resid
ency
of h
olde
r–
“off
icial
”
defin
ition
, e.g
. for
IMF
–
rele
vant
to in
tern
atio
nal r
esou
rce
trans
fer
–
hard
to g
et in
form
atio
n on
deb
t sec
uriti
es•
Re
latio
n be
twee
n ju
risdi
ctio
n an
d re
siden
cy in
crea
singl
y te
nuou
s; th
ough
pos
sibly
stre
ngth
enin
g be
twee
n ju
risdi
ctio
n an
d cu
rren
cy•
N
o “r
ight
”
defin
ition
, dep
ends
on
purp
ose
of a
nalys
is
4
Why
?
5
Deb
t Man
ager
’s P
ersp
ectiv
e?
•
Redu
ces r
isk–
A
llow
s gov
ernm
ent t
o m
ove
to m
ore
robu
st d
ebt p
rofil
e•
Impr
oves
the
choi
ce se
t
–
Prov
ides
resil
ience
in fa
ce o
f sud
den
stop
s in
inte
rnat
iona
l m
arke
ts–
Pr
ovid
es a
dditi
onal
flexi
bilit
y to
resp
ond
to b
udge
tary
shoc
ks
•
Redu
ces i
ssue
r’s c
osts
–
redu
ces l
iqui
dity
pre
mia
•
Link
bet
wee
n D
M a
nd D
Mkt
de
velo
pmen
t key
elem
ent
of B
ank-
Fund
MTD
S
fram
ewor
k
6
Oth
er B
enef
its
•
Incr
ease
the
effic
iency
and
com
plet
enes
s of t
he
dom
estic
cap
ital m
arke
ts•
Fa
cilita
tes t
he u
se o
f mar
ket s
ecur
ities
for m
onet
ary
polic
y op
erat
ions
–
Allo
ws m
ore
inde
pend
ent m
onet
ary
polic
y–
St
reng
then
s the
tran
smiss
ion
mec
hani
sm–
Co
ntrib
utin
g to
bro
ader
mac
ro-e
cono
mic
stab
ility
•
Spur
s ins
titut
iona
l and
regu
lator
y de
velo
pmen
t ne
cess
ary
for w
ider
priv
ate
sect
or m
arke
ts–
Cr
eate
s yiel
d cu
rve
(for p
ricin
g) a
nd p
rovi
des b
ench
mar
k–
G
ener
ates
inve
stor
app
etite
7
Oth
er B
enef
its
•
Facil
itate
s a m
ore
effic
ient a
lloca
tion
of fi
nanc
ial
reso
urce
s acr
oss t
he w
hole
econ
omy
–
True
opp
ortu
nity
cos
t of f
inan
cing
refle
cted
in m
arke
t in
tere
st ra
tes
–
Enh
ance
s mac
ro-e
cono
mic
grow
th•
E
nhan
ces f
inan
cial s
tabi
lity
–
Offe
rs a
gent
s too
l for
hed
ging
the
asse
t-liab
ility
mism
atch
on
their
ow
n ba
lance
shee
ts, r
educ
ing
risk
of c
reat
ing
unex
pect
ed c
ontin
gent
liab
ilitie
s (ba
nkin
g se
ctor
)•
O
vera
ll, e
nhan
ces e
cono
my’s
abi
lity
to w
eath
er
exte
rnal
shoc
ks–
Ra
tiona
le fo
r G8
initi
ativ
e to
dev
elop
loca
l bon
d m
arke
ts
in A
fric
a
8
Tre
nds
9
Impa
ct o
n ri
sk
• Man
y E
Ms
ha
ve b
een
follo
win
g an
exp
licit
stra
tegy
to re
duce
exc
hang
e ra
te ri
sk in
the
debt
por
tfolio
–
Incr
easin
g th
e pr
opor
tion
of d
omes
tic se
curit
ies•
DM
ofte
n w
orki
ng in
coo
pera
tion
with
oth
er
agen
cies
–
Bo
th p
ublic
and
priv
ate
–
Com
plem
enta
ry re
form
s
10
dom
estic
deb
t sha
res
perc
ent o
f tot
al, b
y ju
risdi
ctio
n
020406080100
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Sou
rce:
Pan
izza
(200
8)
Russ
iaMex
icoTu
rkey
Chi
na
Thai
land
Kor
ea
Bra
zil
Indo
nesi
a
11
Inst
rum
ents
• Gre
ater
div
ersit
y of
inst
rum
ents
–
Long
er, f
ixed
-rate
teno
rs–
In
flatio
n-in
dexe
d de
bt–
Fl
oatin
g ra
te n
otes
–
Reta
il de
bt•
Refle
ctin
g ex
pans
ion
of in
vest
or b
ase
…
12
Cha
nge
in D
ebt C
ompo
sitio
n (B
razi
l)
2%
35%
42%
31%
9%
24%
47%
10%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002
2007
R$
Fixe
dR
$ Fl
oatin
gR
$ Pr
ice
inde
xed
FX
13
Cha
nge
in D
ebt C
ompo
sitio
n (T
urke
y)
23%
34%
27%
33%
26%
23%
23%
10%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003
Oct
2008
Oct
YTL
Fix
ed
YTL
Var
iabl
eFX
Fix
ed
FX V
aria
ble
14
Impa
ct o
n ri
sk
•
Whi
le th
is ha
s gen
erall
y in
crea
sed
the
inte
rest
rate
ex
posu
re o
f the
por
tfolio
, ove
rall
vuln
erab
ilitie
s ha
ve b
een
redu
ced.
–
Braz
il, b
etw
een
2002
and
200
8, th
e se
nsiti
vity
of t
he n
et
publ
ic se
ctor
deb
t /G
DP
ratio
to a
com
bine
d 3
stan
dard
de
viat
ion
shoc
k to
bot
h in
tere
st a
nd e
xcha
nge
rate
s has
de
cline
d sig
nific
antly
from
+16
.5%
in 2
002
to -4
% in
20
08
–
Turk
ey, i
n 20
01 im
pact
of a
5%
dep
recia
tion
wou
ld a
dd
2.2%
to d
ebt /
GD
P; b
y 20
07 th
is ha
d de
cline
d to
0.6
%.
But i
nter
est r
ate
risk
still
hig
h –
5%
incr
ease
in ra
tes
wou
ld a
dd 1
.6%
to d
ebt /
GD
P in
200
1; re
duce
d to
1.3
%
in 2
007
15
How
?
16
Gen
eral
Pre
-con
ditio
ns
• Mac
roec
onom
ic st
abili
ty–
H
igh
and
volat
ile in
flatio
n–
U
nsus
tain
able
debt
leve
ls–
Ba
lance
of p
aym
ents
vul
nera
bilit
y–
O
ver-v
alued
exc
hang
e ra
teall
lead
to h
igh
risk
prem
ia an
d lo
w in
vest
or
appe
tite
17
App
ropr
iate
Mar
ket I
nfra
stru
ctur
e
•
Soun
d (a
nd in
depe
nden
t) re
gulat
ory
fram
ewor
k•
Ro
bust
pay
men
t and
settl
emen
t sys
tem
s•
A
ppro
priat
e leg
al fr
amew
ork
–
Ade
quat
e an
d w
ell-e
nfor
ced
cont
ract
s–
In
solv
ency
pro
cedu
res
•
Supp
ortiv
e ta
x re
gim
e–
A
im fo
r tax
neu
tralit
y–
Co
nsid
er o
pera
tiona
l cos
ts•
Th
ese
cond
ition
s bui
ld c
onfid
ence
in th
e in
tegr
ity o
f th
e m
arke
t
18
Deb
t Man
agem
ent S
peci
fic
•
Com
mitm
ent t
o ac
cept
mar
ket-b
ased
out
com
es•
So
und,
tran
spar
ent d
ebt m
anag
emen
t stra
tegy
–
Enh
ance
s inv
esto
r und
erst
andi
ng–
If
intro
ducin
g ne
w in
stru
men
ts -
ne
ed to
com
mit
to
cont
inue
d m
inim
um su
pply
–
Help
s red
uce
risk
prem
ia
•
Regu
lar a
nd p
redi
ctab
le iss
uanc
e pl
an–
St
anda
rd, b
ench
mar
k in
stru
men
ts
•
Inve
stor
relat
ions
–
Effe
ctiv
e di
alogu
e lea
ds to
sync
hron
izat
ion
of n
eeds
19
Lin
ks to
eff
ectiv
e ca
sh m
anag
emen
t?
• Requ
ired
to p
lan is
suan
ce c
alend
ar e
ffec
tivel
y–
A
void
can
celli
ng (o
r add
ing)
auc
tion
at sh
ort
notic
e•
Regu
larity
of i
ssua
nce
–
May
resu
lt in
runn
ing
shor
t-ter
m c
ash
balan
ces
on T
SA•
Use
of b
ench
mar
k bo
nds
–
Chall
enge
on
rollo
ver
–
Reta
in fl
exib
ility
in le
gal p
rovi
sions
for b
uyba
cks
or o
ther
deb
t res
truct
urin
g op
erat
ions
20
Issu
ance
mec
hani
sm
•
Key
pol
icy c
hoice
•
Auc
tions
, syn
dica
tion
or ta
p /
fixed
pric
e te
nder
–
Exe
cutio
n ris
k–
Pr
ice
disc
over
y•
A
uctio
ns -
U
nifo
rm o
r Mul
tiple
–
Reve
nue
cons
eque
nces
–
“win
ner’s
cur
se”
–
Impl
icatio
ns fo
r par
ticip
atio
n•
Re
stric
tions
on
parti
cipat
ion
–
Cred
it ris
k–
“c
orne
ring”
th
e m
arke
t
21
Prim
ary
deal
ers?
•
Adv
anta
ges
–
Dist
ribut
ion
–
Prom
ote
mar
ket
–
Redu
ce e
xecu
tion
risk
–
Prov
ide
mar
ket i
nfor
mat
ion
and
advi
ce•
Pr
e-re
quisi
tes
–
Com
petit
ion
(and
num
ber)
•
Link
to se
cond
ary
mar
ket d
esig
n–
Dec
ision
s on
prim
ary
mar
ket a
cces
s sho
uld
be ti
ed to
mar
ket-m
akin
g ob
ligat
ions
•
Des
ign
ince
ntiv
es to
mee
t iss
uer’s
obj
ectiv
es–
Non
-com
petit
ive
faci
litie
s–
Fees
22
Pric
e tr
ansp
aren
cy
•
Ofte
n lin
ked
to c
hoice
of s
econ
dary
mar
ket t
radi
ng
mec
hani
sm–
N
eed
for c
oord
inat
ion
with
secu
rities
mar
ket r
egul
ator
•
Requ
ired
if m
arke
t to
prov
ide
soun
d re
fere
nce
poin
t–
N
eede
d fo
r rep
o
and
othe
r valu
atio
n
•
Role
for o
fficia
l pric
es–
Li
nk to
PD
obl
igat
ions
–
N
atur
al di
since
ntiv
e fo
r dea
lers t
o be
tran
spar
ent
•
Eve
n m
ore
criti
cal w
hen
cond
ition
s are
vol
atile
23
Div
erse
inve
stor
bas
e
• Nee
d to
redu
ce c
once
ntra
tion
of in
vest
or b
ase
/ in
crea
se d
iver
sity
–
Min
imiz
e lo
ss o
f acc
ess
–
Enh
ance
liqu
idity
• Bank
s–
Ca
ptiv
e m
arke
t?–
Bu
y-to
-hol
d?–
Co
ntin
gent
risk
?
24
Fore
ign
inve
stor
s?
•
Broa
dens
inve
stor
bas
e an
d im
prov
e m
arke
t liq
uidi
ty–
O
ften
cata
lyst f
or c
hang
e, fa
cilita
ting
the
intro
duct
ion
of
long
er-te
rm fi
xed
rate
bon
ds
•
Turk
ey: 5
yea
r fix
ed ra
te b
ond
in 2
006;
5 y
ear i
nflat
ion-
linke
d bo
nd in
20
07•
Braz
il: 1
0 ye
ar fi
xed
rate
bon
d in
200
6
•
But b
ring
chall
enge
s …–
M
ay e
ncou
rage
spec
ulat
ive
inflo
ws a
nd c
ompl
icate
mon
etar
y po
licy
–
May
agg
rava
te m
arke
t vol
atili
ty if
sign
ifica
nt c
apita
l out
flow
s
25
Oth
er in
vest
ors?
•
Inst
itutio
nal i
nves
tors
–
Regu
lator
y re
form
requ
ired?
–
Cont
ract
ual s
avin
gs m
arke
t hav
e pl
ayed
a c
ataly
st ro
le in
dev
elop
ing
liqui
dity
(E.g
. Chi
le a
nd P
olan
d –
pens
ion
refo
rm tr
igge
r)–
Mut
ual f
unds
can
also
be
impo
rtant
•
Reta
il–
Dire
ct o
r ind
irect
?–
Can
be im
porta
nt se
ctor
(e.g
. Sou
th A
fric
a, H
unga
ry, B
razi
l)–
Cost
-eff
icie
nt d
istrib
utio
n m
echa
nism
–
Regu
lator
y re
quire
men
ts (e
.g. a
void
mis-
selli
ng)
–
Spec
ializ
ed in
stru
men
ts•
In
vest
or e
duca
tion
criti
cal a
s sav
ings
opt
ions
incr
ease
26
Impa
ct o
f cri
sis
27
Ear
ly 2
008
…
•
Initi
ally,
prim
ary
mar
kets
look
ed to
be
fairl
y ro
bust
•
DM
s
did
revi
se fi
nanc
ing
plan
s–
Sw
itche
d in
to sh
ort-t
erm
or f
loat
ing
rate
not
e au
ctio
ns
•
Sept
embe
r con
ditio
ns d
eter
iora
ted
signi
fican
tly•
So
me
regi
onal
cont
agio
n–
Po
land
affe
cted
by
nega
tive
deve
lopm
ents
in H
unga
ry
28
Bra
zil
8.00
10.0
0
12.0
0
14.0
0
16.0
0
18.0
0
20.0
0
3M6M
1Y2Y
3Y4Y
5Y
Jan-
08N
ov-0
8M
ay-0
8
Mex
ico
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
3M
1Y
3Y
5Y
7Y
9Y
15Y
30Y
Jan-
08M
ay-0
8N
ov-0
8
Hun
gary
6.00
7.00
8.00
9.00
10.0
0
11.0
0
12.0
0
13.0
0
3M6M
1Y3Y
5Y10
Y15
Y
Jan-
08M
ay-0
8N
ov-0
8
Pola
nd
5.00
5.50
6.00
6.50
7.00
7.50
1Y2Y
3Y4Y
5Y9Y
10Y
Jan-
08M
ay-0
8N
ov-0
8
29
EM
BI
sp
read
s?
Jan
31O
ct 3
1Ch
ange
Braz
il25
445
1+
197
Mex
ico19
839
0+
192
Hun
gary
106
438
+33
2
Polan
d10
236
8+
266
30
Post
Sep
tem
ber
…
• Exi
t of f
orei
gn in
vest
ors a
dded
sign
ifica
nt
volat
ility
to e
xcha
nge
rate
s•
Dea
lers
hav
e w
eake
r bala
nce
shee
ts–
A
ggra
vate
d by
incr
ease
d vo
latili
ty in
mar
kets
–
Lim
iting
abi
lity
to m
eet P
D o
blig
atio
ns–
Se
cond
ary
mar
ket l
iqui
dity
dry
ing
up –
ab
senc
e of
pric
es …
• Prim
ary
issua
nce
decl
inin
g (E
Ms
dr
awin
g on
ca
sh c
ushi
ons)
31
Fore
ign
inve
stor
s …
exiti
ngN
on-r
esid
ent h
oldi
ngs o
f gov
ernm
ent b
onds
(Jan
200
8 =
1)
0.6
0.7
0.8
0.91
1.1
1.2
1.3
1.4
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Turk
eyPo
land
H
unga
ryM
exic
o
32
Impa
ctin
g sp
read
s …
33
Lea
ding
to so
me
pric
e di
stor
tions
…Ev
olut
ion
of T
urki
sh Y
ield
s, 20
08
051015202530 1/3/
082/
3/08
3/3/
084/
3/08
5/3/
086/
3/08
7/3/
088/
3/08
9/3/
0810
/3/0
8
TUR
K 2
012
CPI
TU
RK
201
2 Fi
xed
Impl
ied
Bre
ak-E
ven
Infl
atio
n R
ate
34
Les
sons
?
• Nee
d to
dev
elop
stra
tegi
c, no
t jus
t rel
ativ
e va
lue,
inve
stor
bas
e•
Main
tain
stro
ng c
ash
rese
rves
• Main
tain
app
ropr
iate
scop
e fo
r fle
xibi
lity
–
in
both
issu
ance
and
oth
er a
spec
ts o
f mar
ket
mic
rost
ruct
ure
• Dev
elop
stro
ng d
ialog
ue w
ith m
arke
t pa
rtici
pant
s
35
Con
clus
ion
36
Con
clud
ing
rem
arks
•
DM
and
dom
estic
deb
t mar
ket d
evelo
pmen
t int
rinsic
ally
linke
d•
A
cces
s to
deep
and
liqu
id d
omes
tic m
arke
t ena
bles
DM
to
redu
ce ri
sk w
hile
cont
ainin
g co
st–
M
ore
robu
st d
ebt p
rofil
e–
In
crea
sed
capa
city
to a
bsor
b sh
ocks
•
Brin
gs w
ider
ben
efits
for t
he e
cono
my
–
Mor
e in
depe
nden
t (an
d ef
fect
ive
mon
etar
y po
licy)
–
Spur
s bro
ader
fina
ncial
sect
or d
evelo
pmen
t•
An
effic
ient
yie
ld c
urve
•
Refe
renc
e fo
r valu
ing
and
hedg
ing
othe
r sec
uriti
es
37
Con
clud
ing
Rem
arks
• Nee
d to
be
com
mitt
ed to
–
W
illin
gnes
s to
acce
pt m
arke
t out
com
es–
Tr
ansp
aren
cy–
E
ffect
ive
cash
man
agem
ent
• Supp
orte
d by
dev
elop
men
t of d
omes
tic in
vest
or
base
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