Official Loans and Sovereign Market Access: Evidence on Catalysis - - PowerPoint PPT Presentation

▶
official loans and sovereign market access
SMART_READER_LITE
LIVE PREVIEW

Official Loans and Sovereign Market Access: Evidence on Catalysis - - PowerPoint PPT Presentation

Nov 30, 2022 119 likes •445 views

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions Official Loans and Sovereign Market Access: Evidence on Catalysis from the Euro Area 1 Aitor Erce June, 2019 1 Joint work with Giancarlo

slide-1
SLIDE 1

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Loans and Sovereign Market Access: Evidence on Catalysis from the Euro Area1

Aitor Erce June, 2019

1Joint work with Giancarlo Corsetti and Timothy Uy.

slide-2
SLIDE 2

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Key motivating facts

  • During the recent crisis, euro area sovereigns received support

from both IMF and ESM/EFSF/EFSM

  • Original loans design followed the IMF blueprint (EFF, SBA)
  • Expected to have a catalytic effect on private financing
  • In reaction to set-backs, the type and terms of euro area
  • fficial lending evolved significantly
  • Beyond balance of payments needs (see loan to Spain)
  • Larger loan sizes
  • Longer maturities and lower rates
  • Management of repayment flows
slide-3
SLIDE 3

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Debt Composition and Market Spreads

ESM debt includes EFSM loans (for Ireland, also bilateral loans from DK and UK)

5 10 15 20 25 30 20 40 60 80 100 120 140

12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013 12/2013 04/2014 08/2014 12/2014

Ireland

ESM debt IMF debt Market debt market rate (rhs)

5 10 15 20 25 30 20 40 60 80 100 120 140

12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013 12/2013 04/2014 08/2014 12/2014

Portugal

ESM debt IMF debt Market debt market rate (rhs)

slide-4
SLIDE 4

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms in the euro area

Maturities and marginal lending rate

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Maturity 7.5 years 15 years 15 years 22 years 22 years Interest rate 525 bps 272 bps 255 bps 226 bps 226 bps Maturity 7 years 7 years 7 years 7 years 7 years Interest rate 337 bps 321 bps 307 bps 309 bps 404 bps Maturity

  • 15 years

15 years 22 years 22 years Interest rate

  • 277 bps

233 bps 210 bps 210 bps Maturity

  • 7 years

7 years 7 years 7 years Interest rate

  • 321 bps

307 bps 309 bps 404 bps Sources: International Monetary Fund, European Commission, European Financial Stability Facility, European Stability Mechanism and Bloomberg. Ireland EFSF/ESM IMF Portugal EFSF/ESM IMF

slide-5
SLIDE 5

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms in the euro area

Repayment Profiles

slide-6
SLIDE 6

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Analytical Issues

  • Debt sustainability and market access cannot be assessed

independently of the terms of official lending:

  • they can affect governments’ incentives to issue, repay, or

default (like tax capacity, spending or inflation)

  • they can affect investors’ incentives to roll-over (catalysis)
  • What are the trade-offs in varying the terms of official loans?
  • How do official lending terms affect debt sustainability?
  • And market access? Any evidence of catalysis?
  • Striking absence of empirical work (compare with hundreds of

papers on QE) - this paper

slide-7
SLIDE 7

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Policy Issues In the euro area, official lending shifted from irregular issuers in international capital markets to:

  • regular issuers in deep and liquid domestic markets
  • heavily financialized and interconnected
  • with structural imbalances requiring a significant adjustment

Traditional approach to official lending put to the test:

  • Spillover and contagion
  • Exceptional access policy and the “systemic exemption”
  • Revamp debt sustainability frameworks (DSA)
  • Avoid arguments like “ Greece’s debt will be sustainable if it

reaches 120% of GDP by 2020”

  • Increased role for gross financing needs within the IMF’s DSA
slide-8
SLIDE 8

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Roadmap

  • Summarize theoretical mechanisms by which official loans

affect market acces and perceptions of sustainability in the face of fundamental and roll-over risks

  • Outline Corsetti et al. (2018)
  • Provide evidence on the link between market access conditions

and the terms of official loans

  • Effect of official maturities and interest rates on sovereigns’

market access terms

  • Discuss policy implications
slide-9
SLIDE 9

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Corsetti et al. (2018) - framework

  • Quantitative model as in Conesa-Kehoe (2014): government

sets taxes, borrows from investors and chooses whether to repay or default (against an output loss)

  • Roll-over risk: incentive to run down debt (exit crisis)
  • Output risk: incentive to run debt up (smooth consumption)
  • Augment it with two types of official lenders
  • One lends using short maturities
  • The other offers long maturity loans
slide-10
SLIDE 10

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Corsetti et al. (2018) - findings

  • Availability of official loans raises debt levels at which default

is not optimal in a liquidity crisis, but lowers them during deep recessions

  • More with longer maturities
  • Calibration to Portugal. Counterfactuals show that sustainable

debt ranges from 80% to 180% GDP:

  • state of the economy (output and market access) and
  • terms of official loans (composition of borrowing)
slide-11
SLIDE 11

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Other channels discussed in the literature

  • Seniority (Bolton and Jeanne 2009)
  • Moral hazard (Uhlig and Roch 2018, Aguiar and Amador

2018)

  • Conditionality and structural adjustment (Muller et al. 2016,

Martin et al. 2018)

slide-12
SLIDE 12

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

The effect of official lending terms on market access

  • We use various modifications to the Portuguese and Irish

loans as “experiments”

  • In July 2011, both loans featured a 7-year maturity extension

(to 15 years) & 200+ spread reduction

  • In December 2013, both loans featured an additional 7-year

maturity extension (to 22 years)

  • Plot yield curves and changes in bid-ask spreads before and

after the contract amendments

  • Regression-based event analysis using benchmark bonds

(Christensen and Gillan 2018)

  • Panel regressions using bond data (D’Amico and King 2013)
slide-13
SLIDE 13

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms and Market Access: Yield Curves

slide-14
SLIDE 14

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms and Market Access: Yield Curves

slide-15
SLIDE 15

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms and Market Access: Liquidity

slide-16
SLIDE 16

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Official Lending Terms and Market Access

  • Yield curves shifted down and flattened out
  • Market liquidity improved
  • Heterogeneous effects along the yield curve
  • As intended!
slide-17
SLIDE 17

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis. Benchmark Instruments

  • Evaluate the daily dynamics of specific bonds one week

around the date of the announcements

  • Focus on 3-year, 5-year and 10-year benchmark yields - most

liquid ones

  • Consider potential confounding factors, including monetary

policy and global factors

slide-18
SLIDE 18

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis. Benchmark Instruments

  • As in Foley-Fisher et al. (2016) or Christensen and Gillan

2018, we estimate:

y c

t = α + i=5

  • i=−5

βA

i · DA t+i + i=5

  • i=−5

βF

i · DF t+i+

(1) +

i=5

  • i=−5

βS

i · DS t+i + β4 · Controlst−1 + δm + εc t

yc

t is the yield of benchmark bond with maturity c at time t.

DA

c,t+i, DF c,t+i, and DS c,t+i are dummies indicating that the

corresponding observation is i periods away from each event. Controlst−1 include ECB actions dummies, Home & US stock markets, VIX, oil price, and monthly fixed-effects (δm) (βe

−5, ..., βe 5) collect the dynamics of the yield of the corresponding

benchmark bond one week around event e.

slide-19
SLIDE 19

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 5

5 10

  • 5

5 Day

  • Ireland. 3-year maturity
slide-20
SLIDE 20

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 4
  • 2

2 4

  • 5

5 Day

  • Ireland. 5-year maturity
slide-21
SLIDE 21

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 2
  • 1

1 2

  • 5

5 Day

  • Ireland. 10-year maturity
slide-22
SLIDE 22

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 4
  • 2

2 4

  • 5

5 Day

  • Portugal. 3-year maturity
slide-23
SLIDE 23

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 2
  • 1

1 2 3

  • 5

5 Day

  • Portugal. 5-year maturity
slide-24
SLIDE 24

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Regression-based event analysis: Effect of the 2011 loan amendments

  • 2
  • 1

1

  • 5

5 Day

  • Portugal. 10-year maturity
slide-25
SLIDE 25

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Panel OLS. All available bonds

  • Collect all Portuguese and Irish bonds available during

2006-2016 (Bloomberg)

  • Over 300 bonds, daily data
  • Remove those without yield information and those with erratic

dynamics

  • Usable sample contains 130+ bonds, with maturities ranging

from 2 months to 100 years

slide-26
SLIDE 26

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Irish Bonds

5 10 15 Yields (in %)

2006 2009 2012 2015

Source: Bloomberg. A few bonds were dropped as they presented an erratic or too static behaviour.

Ireland Sovereign bond yields- secondary market

slide-27
SLIDE 27

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Portuguese Bonds

5 10 15 20 Yields (in %) 1 2006 . 2012 2009 2015

Source: Bloomberg. A few bonds were dropped as they presented an erratic or too static behaviour.

Portugal Sovereign bond yields- secondary market

slide-28
SLIDE 28

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Panel OLS. All available bonds. Methodology

  • Similar to D’Amico and King (JFE, 2013), we use the

following model:

yi,t,c = α + γ · yi,t−1,c + βM · Loan Maturityc,t + βS · Loan Spreadc,t+ + β · Controlsi,t−1 + δi + δm + εi,t,c

where yi,t,c is the yield of bond i from country c at time t. Loan Maturityc,t and Loan Spreadc,t stand for the maturity and spread of euro area official loans to country c at time t, and Controlsc,t−1 contains identical variables to those used before. δi and δm are bond and month fixed-effects, respectively.

slide-29
SLIDE 29

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Panel OLS. All available bonds. Maturity-specific effects

  • Allow for maturity-specific effects by modifying the model as

follows:

yi,t,c = α + γ · yi,t−1,c + βM · Loan Maturityc,t + βS · Loan Spreadc,t+ + βMm · Loan Maturityc,t · Bond Maturityi,t,c + β · Controlsi,t−1+ +δi + δm + εi,t,c

Longer official maturities affect yields (βM), but the effect changes depending on the maturity of the bonds (βMm)

slide-30
SLIDE 30

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Panel OLS. All available bonds. Results

(1) (2) (3) (4) (5) All data Portugal Ireland with changes By maturities OL Maturity

  • 0.00139∗∗∗
  • 0.000469
  • 0.00207∗∗∗
  • 0.00140∗∗
  • 0.00264∗∗∗

(-4.44) (-1.18) (-4.56) (-2.06) (-6.58) OL Spread 0.0531∗∗∗ 0.0435∗∗∗ 0.0604∗∗∗ 0.0446∗∗∗ 0.0747∗∗∗ (8.25) (11.47) (6.43) (5.76) (7.46) OL maturity change 0.000135 (0.20) OL spread change 0.0428∗∗∗ (2.68) OL maturity x bond maturity 0.000000395∗∗ (2.56) N 54205 23999 30206 54205 54205 Bond FE Y Y Y Y Y Month FE Y Y Y Y Y Other controls Y Y Y Y Y

t statistics in parentheses

∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01

slide-31
SLIDE 31

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Policy Implications

  • Moral hazard and conditionality design: Official lending terms

affect incentives but, in the face of large structural imbalances, unclear on what direction (Muller et al. JEEA 2015)

  • Measurement of debt sustainability: Official lending terms

affect critical indicators within DSA (Gabriele et al., 2017)

  • Debt restructuring: relief is a function of official lending,

including the behavior of private investors (IMF, 2014)

  • Coordination within the global safety net: avoid Greece in

summer 2015 - style situations (Cheng, 2017)

slide-32
SLIDE 32

Motivating facts Analytical and Policy Issues Roadmap Theory Empirics Policy Implications Conclusions

Conclusions

  • Catalytic effects (market access conditions by sovereigns)

depend critically on the terms of official lending

  • Spreads on official loans affect secondary market yields
  • Longer official loans affect bonds with later maturities
  • Our findings have implications for both program design and

debt sustainability analysis