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Mr. Jonathan David Ostry and Jun I. Kim
Noting that the aftermath of the global financial crisis has left many advanced economies with very high sovereign debt ratios and some emerging markets with high debt, this report considers whether there are ways to expand fiscal space that do not involve countries paying down debt or promising to do so in the future, to make fiscal consolidation more growth-friendly. It explains that policymakers argue that their fiscal space is limited and that it would be difficult to take advantage of the opportunity of low interest rates to undertake fiscal expansion, and it considers a ways to raise fiscal space that does not require contractionary fiscal policy and whether there is a way to make fiscal consolidation more growth-friendly to produce larger gains in fiscal space. It argues that debt management policies may provide an answer to expanding fiscal space for a given path of primary fiscal balances by reducing the risk that a sovereign may default in bad states and generate a payoff in terms of reduced to real borrowing costs. It describes two debt management policies: issuance of GDP-linked debt and issuance of longer maturity bonds, as opposed to short-term debt. It focuses on the effect of these debt management policies on real borrowing costs and default risk for the sovereign and details the literature on GDP-linked debt and the maturity structure and how the report fills gaps in the literature; how uncertainty affects fiscal space and how debt management can play a role in increasing it, with estimates and simulations of potential gains in fiscal space flowing from debt management; and the sensitivity of the findings to underlying assumptions and policy implications.
Jun I. Kim, Jonathan D. Ostry, and Mr. Maurice Obstfeld

-friendly—producing larger gains in fiscal space for a given path of consolidation? One way involves reducing the risk that the sovereign might default for a given path of primary fiscal balances . Lower default risk would generate a payoff in terms of reduced real debt service costs, buttressing fiscal space (a tangible benefit for all segments of the IMF’s membership—advanced, emerging, and developing). This paper explores the role of two debt management policies: issuance of state-contingent debt, and specifically GDP-linked debt; and issuance of longer-maturity debt, as opposed to

Charles Cohen, S. M. Ali Abbas, Anthony Myrvin, Tom Best, Mr. Peter Breuer, Hui Miao, Ms. Alla Myrvoda, and Eriko Togo

.” Washington, DC . International Monetary Fund (IMF) . 2017 . “ State-Contingent Debt Instruments for Sovereigns .” Board Paper , Washington, DC . Kim , J. I. , and J. D. Ostry . 2018 . “ Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities .” IMF Research Department Paper No.18/04 , Washington, DC . Miyajima , K . 2006 . “ How to Evaluate GDP-Linked Warrants: Price and Repayment Capacity .” IMF Working Paper WP/06/85 , International Monetary Fund , Washington, DC . Moody’s Investors Service . 2018 . “ Sovereign

Charles Cohen, S. M. Ali Abbas, Anthony Myrvin, Tom Best, Mr. Peter Breuer, Hui Miao, Ms. Alla Myrvoda, and Eriko Togo
The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings. Any such restructurings will likely take place during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values, and potentially even relapses into default post-restructuring. State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.
Charles Cohen, S. M. Ali Abbas, Anthony Myrvin, Tom Best, Mr. Peter Breuer, Hui Miao, Ms. Alla Myrvoda, and Eriko Togo
Mr. Jonathan David Ostry and Jun I. Kim

Front Matter Page IMF DEPARTMENTAL PAPER Front Matter Page Cataloging-in-Publication Data Joint Bank-Fund Library Names: Kim, Jun (Jun Il) | Ostry, Jonathan David, 1962- | International Monetary Fund. Title: Boosting fiscal space : The roles of GDP-linked debt and longer maturities / Jun I. Kim and Jonathan D. Ostry. Other titles: The roles of GDP-linked debt and longer maturities. | IMF departmental paper. Description: [Washington, DC] : International Monetary Fund, 2017. | Includes bibliographical references. Identifiers: ISBN

Alex Pienkowski

default to assess the impact they have on a government’s debt limit. If debt goes above this limit, then the sovereign will default on its payment obligations; so the higher this threshold, the lower the probability of default. The model incorporates an endogenous credit risk premium to compensate creditors from holding risky debt. And also a premium on issuing local currency and GDP-linked debt to compensate the creditor for bearing this additional risk. In this sense, there is no ‘free lunch’ for the sovereign, as it must pay for the insurance that it receives from

Alex Pienkowski
This paper provides a tractable framework to assess how the structure of debt instruments—specifically by currency denomination and indexation to GDP—can raise the debt limit of a sovereign. By calibrating the model to different country fundamentals, it is clear that there is no one-size-fits-all approach to optimal instrument design. For instance, low income countries may find benefit in issuing local currency debt; while in advanced economies debt tolerance can be substantially enhanced through issuing GDP-linked bonds. By looking at the marginal impact of these instruments, the paper also provides insight into the optimal portfolio compostion.
International Monetary Fund

simulation for the euro area (see Text Chart, solid lines), shifting a quarter of the debt portfolio to GDP-linked debt would modestly narrow the width of the forecast debt ratio distribution. The narrowing would be more pronounced for countries where the interest-rate growth differential behaves less favorably (Text Chart, dashed lines). 1 Similarly, SCDIs can reduce uncertainty about GFN and impart fiscal space to economies with constrained market access. The corresponding expression for unexpected changes in the GFN/GDP ratio is: V a r ( g f n

International Monetary Fund
Background. The case for sovereign state-contingent debt instruments (SCDIs) as a countercyclical and risk-sharing tool has been around for some time and remains appealing; but take-up has been limited. Earlier staff work had advocated the use of growth-indexed bonds in emerging markets and contingent financial instruments in low-income countries. In light of recent renewed interest among academics, policymakers, and market participants—staff has analyzed the conceptual and practical issues SCDIs raise with a view to accelerate the development of self-sustaining markets in these instruments. The analysis has benefited from broad consultations with both private market participants and policymakers. The economic case for SCDIs. By linking debt service to a measure of the sovereign’s capacity to pay, SCDIs can increase fiscal space, and thus allow greater policy flexibility in bad times. They can also broaden the sovereign’s investor base, open opportunities for risk diversification for investors, and enhance the resilience of the international financial system. Should SCDI issuance rise to account for a large share of public debt, it could also significantly reduce the incidence and cost of sovereign debt crises. Some potential complications require mitigation: a high novelty and liquidity premium demanded by investors in the early stage of market development; adverse selection and moral hazard risks; undesirable pricing effects on conventional debt; pro-cyclical investor demand; migration of excessive risk to the private sector; and adverse political economy incentives.