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Funding Strategies of Sovereign Debt Management: A Risk Focus

Johannes Holler ()
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Johannes Holler: Oesterreichische Nationalbank, Economic Analysis Division

Monetary Policy & the Economy, 2013, issue 2, 51–74

Abstract: Most sovereign debt management agencies operate on a narrow definition of risk which does not reflect the potential of sovereign debt portfolios to insure the budget against macroeconomic shocks. This paper analyzes the different forms of risk implied by the composition of the sovereign debt portfolio and discusses methods for their evaluation. By determining the risk properties of existing debt management instruments we underline the potential of certain debt management instruments to insure the budget against stylized demand and supply shocks producing strong incentives for debt management agencies to operate on a broader definition of risk. The identified risk properties further highlight that the establishment of Economic and Monetary Union reduced market, rollover and liquidity risk in the aggregate euro area debt portfolio, whereas the loss of the risk free status for euro area sovereign assets and the steepening of the yield curve, both triggered by the sovereign debt crisis, led to a shift towards more short-term debt resulting in an increase in rollover risk and market risk.

Keywords: sovereign debt management; portfolio optimization; fiscal insurance theory (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Date: 2013
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