The New York Times collects background information about failures in Russia’s war against Ukraine.
On VoxEU, Myrvin Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, and Eriko Togo discuss the history of government debt with state contingent coupons and offer some lessons.
- In the mid-19th century, the Confederate states issued cotton-linked bonds
- In the late 1970s, Mexico issued oil-linked bonds
- In the 2000s, Turkey issued revenue-indexed bonds
- Since 2014, Uruguay issues nominal wage-issued bonds
- Some other examples (figure taken from the column):
- Obviously, confidence in data quality and thus, quality of institutions is important for the success of such issues.
State contingent securities also have been used in debt restructurings:
The first use of state contingent bonds in debt restructurings occurred in the Brady deals from 1989-97, which allowed commercial banks’ claims on debtor countries to be exchanged for tradable instruments, allowing the banks to clean up their balance sheets. Many of these instruments included ‘value recovery rights’, which envisaged additional debt payments in circumstances where the debtor country’s economic or terms of trade conditions improved substantially … Oil exporters generally linked the payments to oil prices, while other countries linked either to GDP or measures of the terms of trade. Many of the Brady instruments subsequently made significant ongoing upside payments (e.g. Bosnia and Venezuela), while in some cases sovereigns chose to repurchase the instruments as it became clear that upside payments would be triggered (e.g. Mexico, and Bulgaria in the mid-2000s).
More recently, ‘upside’ GDP-warrants have featured as part of the package of bonds issued to creditors in each of the three major restructurings of the past decade: Argentina (2005 and 2010), Greece (2012), and Ukraine (2015). In the case of Grenada (2015), the restructuring deal included instruments with both upside and downside features (Table 2).
Inflation linked bonds have been successful:
Inflation-linked bonds have a long history, dating back to a 1780 issuance by the State of Massachusetts … More recently, they emerged in Latin America in the 1950s and 1960s, in an environment of very high domestic inflation, and the UK became the first advanced economy to issue inflation-linked bonds in 1981. … the global stock of government inflation-linked bonds had grown to around USD 3 trillion by 2015 … Despite this recent growth, inflation-linked debt still accounts for a relatively small share of sovereign debt portfolios in most countries …
Related VoxEU column on policy implications.
The Economist reports about government initiatives aimed at using blockchain technology in the public sector.
- Possible uses include land registries, identity-management systems, health-care records, or elections.
- Proponents expect the technology to improve efficiency and transparency and foster trust.
- Adoption requires significant investments.
- According to a survey “nine in ten government organisations say they plan to invest in blockchain technology to help manage financial transactions, assets, contracts and regulatory compliance by next year.”
- Sweden tests a blockchain-based land registry; Dubai’s government wants to completely shift to blockchain technology by 2020; Estonia stores health records and protects its shared government systems using blockchain-like technolog; Georgia’s land registry uses blockchain technology and has processed 160,000 transactions; Ukraine wants to become “one of the world’s leading blockchain nations,” not least to build trust between government and citizens.
In the FT, Elaine Moore and Neil Buckley report that Ukraine secured a restructuring deal with its creditors. The deal includes a 20% haircut on some bonds as well as new GDP-linked securities. The FT writes:
The IMF alluded to the uncertainty in early August when it reiterated that although it expected Ukraine’s debt operation to be completed, it was willing to support the country even if debt discussions failed and a moratorium was imposed. However, the repercussions of Ukraine defaulting on its debt would have been severe. Ukrainian bonds, issued under English law, contain cross-default clauses that mean missed payments on one can trigger default on all, allowing bondholders to demand repayment, drag a country into lengthy legal battles and exacerbating existing economic problems. … If Ukraine succeeds in a debt restructuring it could plausibly return to international debt markets within a yea r… Market prices for Ukrainian bonds have recovered in recent weeks as hopes rose that the country would avoid default …
The Economist (Free Exchange) reports about prospects of a resolution of the Ukrainian debt crisis. It remains unclear whether the planned haircut on some debt tranches will suffice to satisfy IMF demands.