Choosing the Currency Structure of Foreign‐currency Debt: A Review of Policy Approaches

Abstract

Starting from the constraints and incentives that cause countries to issue debt in foreign currency, this paper provides an overview of policy approaches for choosing the optimal currency structure of sovereign foreign-currency debt. The objective of sovereign debt managers generally includes both risk and cost minimization, while constraints to foreign-currency debt allocation originate in the parameters of the domestic macroeconomy, the shocks it faces, and the initial conditions. Overall, the main parameters that drive the solutions for optimal currency allocation of foreign-currency debt are the covariances of macrovariables with exchange rates and the variances of different exchange rates. Both the covariances and the exchange rate volatility can be deceptive when a fixed exchange rate regime is maintained, however. To adequately capture the expected covariances in the context of managed exchange rate regimes, we suggest that sovereign debt managers work with equilibrium instead of actual exchange rates. For the same reason and because the estimates of relative exchange rate variances should be forward looking, we suggest using synchronization indicators in the policy analysis to better capture the underlying drivers of exchange rate volatility across currencies.

What Strategies for the Sustainable Management of Public Debts in Sub-Saharan Africa?

“…By assuming that the entire amount will be disbursed on the date of application of loan contract, there can either be gains in exchange or a loss. Therefore a variation in exchange rate leads to a variation in stocks and flows of the external public debt in the same direction [25][26][27][28]. [29] studied the effects of exchange rate on debt and suggests that the current account balance measures the extent and the direction of international borrowing.…”

Evaluation of Sustainability of the General Government Debt in a Small Open Economy

“…To some degree, structure of the general government debt obligations in small open economies also should be considered more carefully than in large economies, because it is argued that structure of the debt has influence on the sustainability of the debt (Melecky, 2012;Consiglio & Staino, 2012;Date et al, 2011). For instance, it is argued that the higher the share of short-term credit is in overall debt, the larger and more vulnerable is the annual flow of debt-service obligations.…”

“…As already discussed, sometimes solvency of the general government is evaluated in respect of the debt structure peculiarities (Melecky, 2012;Consiglio & Staino, 2012;Date et al, 2011;Milne, 2011;Choi et al, 2010). Lately, however, it is increasingly recognized that in applied economic and financial models, the accuracy of the results is strongly influenced by the use of stochastic variables (Consiglio & Staino, 2012;Date et al, 2011;Hajdenberg & Romeu, 2010;Frank & Ley, 2009;Ciegis et al, 2009;Ferrarini, 2009;Budina & van Wijnbergen, 2009;Ferrarini, 2008;Tanner & Samake, 2008;Genberg & Sulstarova, 2008) and complex analysis of debt indicators (Knedlik & Von Schweinitz, 2012;Sopek, 2009).…”