Tom Best, Christopher Dielmann, Meghan Greene, Tania Mohd Nor, 06 June 2017

State-contingent debt instruments could provide sovereigns with additional policy space in bad states of the world. This column presents an Excel-based tool that allows debt managers and investors to explore the impact of different designs of such instruments on public debt and gross financing needs under user-specified macroeconomic scenarios (both baseline and shocks). Illustrative results show the potential benefits of different bond designs on both debt and gross financing needs.

Myrvin L. Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, Eriko Togo, 06 June 2017

The case for state-contingent debt instruments, linking contractual debt to a pre-defined variable, has been theorised but not developed. This column gives a historical perspective of the issuance of these instruments to alleviate liquidity and/or solvency pressures on the sovereign in ‘normal times’ and during restructurings. It also discusses the valuable lessons that inflation-linked bonds provide for development of the state-contingent debt instrument market.

S. M. Ali Abbas, Daniel Hardy, Jun Kim, Alex Pienkowski, 06 June 2017

The theoretical benefits of state-contingent debt instruments for sovereigns – such as GDP-linked and extendible bonds – have been advocated by academics for several decades, but only recently have the practical constraints and considerations been explored in detail. This column summarises this more recent work, highlighting key findings on instrument design and on broader market development prospects. 

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