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.
Outlook for sovereign risk
This chapter deals with the complications for issuers generated by the pressures of perceptions of an increase in sovereign risk, in particular whereby “the market” suddenly perceives the debt of some sovereigns as “risky”. A lack of consensus on what exactly constitutes sovereign risk is an important complication to properly measure and price this risk. Since the track-record of “sovereign risk pricing” is not very impressive, suggested market measures of this risk should be treated with great caution. One should, therefore, be very cautious in concluding that the sovereign debt of an OECD country has indeed lost its “risk-free” status. The chapter also argues that (a) the liquidity effects of downgrades by credit rating agencies (CRAs) contribute to very spiky market dynamics and that (b) additional study of the spillover effects of rating changes to other sovereigns is warranted. This chapter deals with the complications for issuers generated by the pressures of perceptions of an increase in sovereign risk, in particular whereby “the market” suddenly perceives the debt of some sovereigns as “risky”. A lack of consensus on what exactly constitutes sovereign risk is an important complication to properly measure and price this risk. Since the track-record of “sovereign risk pricing” is not very impressive, suggested market measures of this risk should be treated with great caution. One should, therefore, be very cautious in concluding that the sovereign debt of an OECD country has indeed lost its “risk-free” status. The chapter also argues that (a) the liquidity effects of downgrades by credit rating agencies (CRAs) contribute to very spiky market dynamics and that (b) additional study of the spillover effects of rating changes to other sovereigns is warranted.