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International Monetary Fund. African Dept.

MARKET A. Background B. Assessment of the Building Blocks for Sovereign Bond Market Development C. Conclusions and Policy Recommendations FIGURES 1. Stock of Sovereign Securities Issued on Regional Market 2. Stock of Local Currency Sovereign Securities 3. Sovereign Bond Market Stages of Building Block Development 4. Interbank Loans, 2014–20 5. Interbank Transactions, 2019–20 6. Stock of CFAF Sovereign Securities 7. Number of Outstanding Auctioned Securities, end-June 2021 8. Secondary Trading on Sovereign Securities 9. Turnover Ratio on

International Monetary Fund. African Dept.

needed. B. Assessment of the Building Blocks for Sovereign Bond Market Development 7. The IMF/World Bank LCBM framework identifies six building blocks that can help analyze the stage of development of the WAEMU’s sovereign security market . These building blocks are intuitively designed to provide focus on key reforms for the efficient functioning of LCBMs: The money/interbank market . It facilitates the implementation of monetary policy and strengthens monetary policy transmission, but also provides a foundation for the maturity extension of sovereign

Miss Yinqiu Lu and Salih N. Neftci
Many developing economies are heavily exposed to commodity markets, leaving them vulnerable to the vagaries of international commodity prices. This paper examines the use of commodity options-including plain vanilla, risk reversal, and barrier options-to hedge such risk. It then proposes the use of a new structured product-a sovereign Eurobond with an embedded option on a specific commodity price. By extracting commodity price risk out of the bond, such an instrument insulates the bond default risk from commodity price movements, allowing it to be marketed at a lower credit spread. The product is also designed to help developing countries establish a credit derivatives market, which would in turn enhance the marketability and liquidity of sovereign bonds.
Miss Yinqiu Lu and Salih N. Neftci

constructed in a way that keeps adverse price movements from affecting the country’s ability to get external funds. Therefore, by enabling the country to smooth debt cost and maintain its cash flow at a reasonable cost, it is ready to finance a deficit. Moreover, the embedded option uses credit derivatives as the underlying instruments, 5 of which market development may help create some liquidity conducive for sovereign bond market development. 6 II. S mooth fluctuations in C ommodity R evenue C ollections —O ption T ransactions Commodity derivatives are widely

Mr. Carlo Cottarelli, Mr. Paolo Mauro, Lorenzo Forni, and Jan Gottschalk
This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits. Thus, by lowering the interest bill while triggering the need to move to primary balance or a small primary surplus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the emerging economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would be ineffective and undesirable in today’s advanced economies.
Mr. Carlo Cottarelli, Mr. Paolo Mauro, Lorenzo Forni, and Jan Gottschalk

does occur from time to time, with adverse implications for countries’ borrowing costs and debt dynamics. For example, considering data on sovereign bond spreads over the past decades, markets sounded false alarms in the vast majority of episodes—see Appendix 1. To place recent sovereign bond market developments in context, the present note reviews macro-fiscal factors underlying government debt dynamics in the top ten advanced economies ranked by needed fiscal adjustment in the illustrative scenario presented in the May 2010 Fiscal Monitor (IMF, 2010): France