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“All in all, developments over the past few years suggest that we might be experiencing a seismic shift in the environment in which policymakers—particularly debt managers and central bankers—operate... This forum offers a great opportunity to discuss in depth some of the main challenges of public debt management during periods of market stress and cyclical weaknesses”, said IMF Deputy Managing Director, Min Zhu.
Delegates acknowledged that a sharp re-pricing of sovereign credit had occurred that has major implications for investor base, capital flows, and financing conditions in sovereign debt markets. A key risk facing advanced economies is the loss of risk-free status for their sovereign debt. As regards the lessons from the crisis for the euro area sovereign debt markets, Benoît Coeuré, Executive Board Member of the ECB, pointed out: “Euro area sovereign debt markets are going through a turbulent period. The inherent pro-cyclicality and the exaggerations that at times characterise financial markets should be recognised and addressed. However, structural problems call for structural answers. The current overhaul of fiscal, financial and economic governance in the euro area will help put the single currency on a sound and sustainable footing.” On the subject of issuing common securities, several participants felt that these instruments would require shared decision-making on national debt and deficits, and probably joint control of fiscal expenditures and taxation.
Delegates expressed concern over major shifts in investor base, as this constrains funding options and choice of instruments. They also discussed the changing role of central banks in the current environment, and felt that central banks need to step outside their regular mandate and engage in consultations with institutions responsible for fiscal policies and macro-prudential regulation, especially when there is a build-up of vulnerabilities. Phil Gerson, Deputy Director of the IMF’s Fiscal Affairs Department, stated that "with debt levels and deficits still high in many advanced economies, further fiscal consolidation is essential, but where feasible this should occur at a steady pace and as part of a medium-term plan with targets in cyclically adjusted terms".
Major emerging markets are also beginning to confront market pressures. They are experiencing significant shifts in their investor base as non-resident holdings of domestic debt have increased considerably in recent years. However, they remain rightfully worried about their ability to absorb massive capital inflows and their readiness to manage sudden stops and outflows. Delegates also discussed the lessons learned from past and more recent experiences on debt restructuring in emerging markets, and exchanged views on sound principles going forward.
The Forum also discussed what the future holds for fixed income markets. Participants expressed the view that it was very difficult to predict how markets will evolve in light of major uncertainties, the changes in the regulatory environment, changes in the investor base, and difficulty to foresee how the current situation in Europe will be resolved. Nevertheless, some themes are clear. As summarised by Robert Sheehy, Deputy Director of the IMF’s Monetary and Capital Markets Department: “Markets are likely to remain fragmented, less liquid than before, more reliant on the domestic investor base, and with a higher cost of intermediation. These changes will undeniably pose significant challenges for debt managers and indeed for globally financial stability.”
The Forum also welcomed ongoing IMF staff work on debt issues. Staff briefed participants on steps underway to improve debt statistics, the debt sustainability analysis framework for market access countries, the stress-testing framework for debt portfolios, and the analytical framework for deepening local debt capital markets. Several delegates suggested analytical work by Fund staff on the impact of the crisis and various policy and regulatory measures on debt capital markets, and offered to contribute to the development of the stress testing framework.