OECD Sovereign Borrowing Outlook 2012
OECD governments are facing unprecedented challenges in the markets for government securities as a result of continued strong borrowing amid a highly uncertain environment with growing concerns about the pace of recovery, surging borrowing costs, sovereign risk and contagion pressures.
The OECD Sovereign Borrowing Outlook provides estimates for 2011 and projections for 2012. Higher than anticipated gross borrowing needs of OECD governments are expected to reach USD 10.4 trillion in 2011 and USD 10.5 trillion in 2012, including a strong increase in longer-term redemptions in 2012. Against this backdrop government debt ratios are expected to remain at high levels.
Raising large volumes of funds at lowest cost, with acceptable roll-over risk, remains therefore a great challenge for a wide range of governments, with most OECD debt managers continuing to rebalance the profile of debt portfolios by issuing more long-term instruments and moderating bill issuance.
Additional challenges for government (and corporate) issuers are the complications generated by the pressures of a rapid increase in sovereign risk, whereby “the market” suddenly perceives the debt of some sovereigns as “risky”, as well as euro area-induced contagion effects. Growing concerns among investors have resulted in the offloading of significant holdings of European debt.
Impact of financial contagion on borrowing operations within the euro area
Issuers had to deal with euro area-induced contagion effects. This chapter notes that, although direct effects are easier to quantify, indirect channels could prove to be more damaging. Indirect channels of contagion include a re-pricing of both sovereign risk and counter-party risk among financial intermediaries. This, in turn, may lead to higher funding costs and roll-over risk for sovereigns and financial institutions, impaired ability to pledge sovereign securities as collateral and flight-to-safety by investors. The chapter also argues that monetary union sovereigns are in particular vulnerable for liquidity crises leading to situations where they cannot (easily) obtain funds to roll over their debt at ‘reasonable’ interest rates.