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Federal Reserve Bank of Chicago
The Stock of External Sovereign
Debt: Can We Take the Data at
‘Face Value’?
Daniel A. Dias, Christine Richmond, and
Mark L. J. Wright
May 2014
WP 2014-05
May 9, 2014
The Stock of External Sovereign Debt:
Can We Take the Data at ‘Face Value’ ?
Daniel A. Dias∗
University of Illinois at Urbana-Champaign, and
CEMAPRE
Christine Richmond∗
University of Illinois at Urbana-Champaign, and
International Monetary Fund
Mark L. J. Wright∗
Federal Reserve Bank of Chicago, and
National Bureau of Economic Research
ABSTRACT
The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum
of future principal repayments, face values are misleading when debts are issued with different
contractual forms or maturities. In this paper, we construct alternative measures of the stock
of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for
differences in contractual form and maturity. We show that our alternative measures: (1) paint a
very different quantitative, and in some cases also qualitative, picture of the stock of developing
country external sovereign debt; (2) often invert rankings of indebtedness across countries, which
historically defined eligibility for debt forgiveness; (3) indicate that the empirical performance of the
benchmark quantitative model of sovereign debt deteriorates by roughly 50% once model-consistent
measures of debt are used; (4) show how the spread of aggregation clauses in debt contracts that
award creditors voting power in proportion to the contractual face value may introduce inefficiencies
into the process of restructuring sovereign debts; and (5) illustrate how countries have manipulated
their debt issuance to meet fiscal targets written in terms of face values.
JEL CODES: E01, F30, F34, H63.
∗
The views expresed in this paper are those of the authors and do not necessarily represent those of the Federal
Reserve Bank of Chicago, the Federal Reserve System, the IMF, or IMF policy. The authors thank, without
implicating, Marcio Garcia for help researching Brazilian debt issuance; Ben Chabot, Moritz Schularick,
François Velde, two anonymous referees, the editor, and numerous seminar participants for comments; and,
especially, Aart Kraay, Ibrahim Levent, and Gloria Moreno of the World Bank for help accessing the data used
for our paper. The authors thank the Center for International Business and Economic Research (CIBER) at
UCLA for research support. Wright also thanks the National Science Foundation for research support under
grant SES-1059829. Dias: ddias@illinois.edu; Richmond: crichmond@imf.org; Wright: mwright@frbchi.org.
1
Introduction
With few exceptions, data on the stock of sovereign debt are presented at face value.
Defined as the undiscounted sum of future principal repayments, face values can be a misleading measure of the stock of sovereign debt for two reasons. First, because face values only
capture principal, two debt contracts that are equivalent–in the sense of having identical future cashflows–will have different face values if the otherwise identical cashflows are divided
into principal and interest in different ways. Second, because face values are undiscounted,
two debt contracts with the same total principal, but amortizing over different time horizons,
will be treated as identical.
The emphasis on face values by statisticians and market participants creates at least
five practical problems. First, the comparison of debt stocks at face value over time and across
countries can generate misleading inferences as a result of significant differences in the contractual structure of debt portfolios over time and across countries. For example, low-income
countries often borrow from official sources over a long time horizon and at low subsidized
interest rates, while middle-income countries borrow at market interest rates over shorter
horizons. Hence, face values may understate the indebtedness of middle-income countries relative to low-income countries. As another example, because international debt markets have
shifted away from bank loans issued at par toward bonds issued at a discount, face values will
tend to increase over time even in the absence of changes in underlying indebtedness. Second, as a consequence, analyses of debt sustainability based on face values will be misleading,
with some relatively low debt countries receiving debt relief at the expense of more highly
indebted countries. Third, face values inhibit the empirical assessment of the quantitative
macroeconomic literature on sovereign debt, since the literature assumes that all sovereign
debts are identical, typically taking the form of zero-coupon bonds, all of whose cashflows
are treated as principal. Fourth, as face values are conventionally used to allocate creditor
voting power in the event of a restructuring of sovereign debts, the restructuring process may
not work efficiently because creditors with identical financial interests have different voting
power. Fifth, if debt targets are specified in terms of face values or if budget deficit targets are
specified excluding interest payments, the issuing country has both the ability and incentive
to manipulate debt issuance to meet these targets. For example, countries can understate
the face value of their debt stocks by issuing par bonds (with a high interest rate and low
principal) instead of the equivalent discount bonds (with a lower interest rate and higher
principal), or by issuing debts with lower face values amortized over a shorter time horizon.
In this paper we construct a new database of external sovereign debt stocks that sheds
light on the extent of these problems. We construct several alternative measures of external
indebtedness for a sample of more than 100 developing countries from 1979 through 2006
using previously unpublished data on the cashflows associated with these countries’ respective
portfolios of external sovereign debts from the World Bank’s Debtor Reporting System (DRS).
Each of our measures preserves the simplicity and transparency of face values, but corrects for
differences in contractual structure that divide cashflows into principal and interest in different
ways. Specifically, instead of looking at the face value of a country’s actual portfolio of debt
contracts–the contractual face value–we measure the face value of a synthetic portfolio
of debts with a common contractual structure that has been constructed to replicate the
cashflows of the country’s actual debt portfolio. Our first measure, motivated by the extensive
focus on zero-coupon bonds in the quantitative theoretical literature on sovereign debt, defines
the face value of a country’s portfolio of debts as the face value of a portfolio of zero-coupon
bonds that has been constructed to match the actual portfolio of debts owed by the country.
We refer to this measure as the zero-coupon-equivalent (ZCE) face value of a country’s debt.
This measure is particularly useful when assessing the empirical success of models in which all
debts take a zero-coupon form, and when assessing the incentives of agents to vary contractual
structure when creditor voting rights and debt targets are written in terms of face values.
Our other measures postulate a positive coupon rate and hence correct for differences in
both contractual structure and the maturity of debts by discounting all future cashflows.
Exploiting a known result, these -coupon-equivalent face values turn out to be equal to
the present value of a debt discounted at per-cent. These measures are especially useful in
assessing differences in indebtedness across countries and over time, as well as in assessing the
incentive to issue short term debt in order to hit debt targets written in terms of contractual
face values.
Our findings bring both good news and bad news for users of data on the stock of
external sovereign debts. The good news is that much of our qualitative understanding of the
2
market for external sovereign debt is preserved when examined in the light of these new data.
The bad news is that much of our quantitative understanding of international debt markets
needs to be revised. Most dramatically, our new measures of the stock of external sovereign
debt reveal that the upper-middle-income countries, and the countries of Latin America and
the Caribbean in particular, are more indebted relative to low-income countries. In some
cases, such as Mexico, the revised measure shows a dramatic difference in the relative level
of indebtedness.
Some of our worst news is reserved for the quantitative theoretical literature on sovereign debt and default. It is by now well known that the benchmark Eaton and Gersovitz
(1981) model of sovereign debt and default, as explored quantitatively by Arellano (2008),
Aguiar and Gopinath (2006), Hamann (2004), and many others, produces levels of the face
value of external sovereign debt that are between 5 and 10 times smaller than the levels
reported in traditional sovereign debt statistics. This empirical failure is all the more striking
when it is noted that these theoretical models restrict attention to zero-coupon bonds in
which all future debt service payments are regarded as principal, thus producing a maximal
value for the model generated face value of sovereign debt. We show that when data on the
stock of external sovereign debt is constructed using our theoretically consistent zero-coupon
equivalent face value measure, it is almost one-and-one-half times as large as traditional estimates, implying that the benchmark model produces levels of the stock of sovereign debt
between 7.5 and 15 times smaller than those observed in practice.
We also point to a potential problem associated with the more widespread adoption
of aggregation clauses in sovereign debt instruments, as envisaged by the Eurogroup (2010).
Since voting rights in the event of a sovereign debt restructuring are proportional to the
contractual face value of a bond, creditors whose debts include a high interest rate will have
fewer voting rights than creditors holding instruments with identical cashflows but lower interest rates. We show using our data that this would have the largest impact on private
sector creditors, indicating that more widespread use of aggregation clauses would lead to
the relative subordination of private sector claims. This may explain the reluctance of bondholders to participate in bond issuances including aggregation clauses and, in the event that
such clauses become widespread, may give private sector creditors an incentive to adopt con3
tractual forms–such as zero-coupon bonds–that would maximize their voting power in the
event of a future sovereign debt restructuring. Finally, we also use our data to document at
least one prima facie case of a country varying the contractual form of its debt issuance in
order to present its external debt position and budget deficit in a more favorable light.
It is important to stress a number of limitations of our analysis. We have little to
contribute to the debate as to the appropriate rate at which the cashflows of debts coming
due at different dates should be discounted in forming a measure of indebtedness. Any
researcher attempting to construct discounted values of debt stocks must confront the fact
that the absence of liquid markets for all but a small number of sovereign debts means it is
not possible to extract discount rates from market data. Moreover, as established by Dias,
Richmond, and Wright (2013), it is not always appropriate to use market discount rates in
constructing measures of the cost of servicing a debt to the issuing developing country that
likely values debt flows on the margin at a different rate than do creditors. In this paper,
which aims to evaluate differences in debt stocks across countries and over time, we follow
a long tradition of using a time- and country-independent discount rate (see, for example,
International Monetary Fund 2004, 2010; Easterly 2001, 2002; and the discussion in Dikhanov
2006).
Data limitations mean that we focus entirely on external sovereign debts, despite the
recent surge in interest in the domestic debts of developing countries (for example, Reinhart
and Rogoff 2011). Nonetheless, it is important to stress that the exact same measurement
problem applies to existing estimates of the stock of domestic sovereign debt. Our study of
the contractual structure of developing country sovereign debt, as well as the way it leads to
misleading estimates of indebtedness, complements Hall and Sargent’s (1997) analysis of the
mismeasurement of interest payments by the U.S. Treasury. Our focus on the contractual
structure of sovereign debt per se leads us to focus on a different set of summary measures
of indebtedness than does Hall and Sargent’s emphasis on the U.S. government’s cost of
borrowing.
The rest of this paper is organized as follows. Section 2 presents a simple framework that is useful in accounting for sovereign debts and illustrates, using a series of simple
examples, the measurement problems associated with using contractual face values when ag4
gregating debts with different contractual structures. Section 3 describes our data sources.
Section 4 presents our quantitative and qualitative findings for the stock of developing country external sovereign debt. Among other things, we show through examples how different
measures of indebtedness would have affected past eligibility for debt relief. Section 5 focuses
on the policy implications of these data, emphasizing the incentives for countries to manipulate their debt stock data, along with the incentives for creditors to vary the contractual form
of their sovereign debts in anticipation of the more widespread use of aggregation clauses in
sovereign debt instruments. Section 6 contains some concluding remarks, while a series of
appendices describe our methods, data sources, and findings with a greater level of detail
than that presented in the paper. Data on the contractual and ZCE face values and on the
present values of external debt for all of the countries in our sample are available online.
2
Conceptual Framework
In this section, we introduce some notation that is helpful for talking about country
debt portfolios. We also define some measures that we will construct later in the paper and
present a series of simple examples to illustrate different debt stock measures, their varying
strengths and weaknesses, and their potential quantitative importance.
2.A
Notation
Consider a country that has a portfolio of debt contracts. Each debt contract specifies
a stream of cashflows denominated in different currencies falling due at future dates. We
denote by
() the cash flow associated with contract = 1 of country = 1
due at time = 0 1 ∞ denominated in currency = 1 We allow for cashflows to be
defined at = ∞ to capture the case of perpetuities for which the principal is never repaid.
Although not a perfect description of the set of all outstanding sovereign debt contracts, we
restrict attention to contracts that pay, as long as there is no default, a non-state-contingent
claim in a prespecified set of currencies at a series of prespecified dates.1
The cashflows associated with a debt contract are typically divided into principal
(). We will say
repayments (or amortization) () and interest payments (or coupons)
1
For more on state contingent sovereign debt, see, for example, Grossman and van Huyck (1988), Kletzer
(2006), Alfaro and Kanczuk (2005), and Sandleris, Sapriza, and Taddei (2008).
5
that two debt contracts and 0 are equivalent if they specify the same cashflows
() =
0
0 () for all time periods and currencies for any countries and 0 even if they divide
these cashflows into amortization and interest in different ways; two equivalent debt contracts
that divide cashflows in different ways will be described as having different contractual forms.
Most countries owe debts denominated in a variety of different currencies. In addition,
some debt contracts are issued in multiple tranches, some of which are denominated in different currencies. If () is the number of units of the numéraire currency, the U.S. dollar,
that can be purchased with one unit of currency then the dollar cashflows of contract
are denoted by dropping the currency subscript or
() =
X
()
()
Likewise, the cashflows of country 0 entire portfolio of debts are denoted by dropping the
contract subscript or
() =
X
()
() =
X
()
These dollar cashflows are divided into dollar amortization and coupon payments analogously.
2.B
Measuring Indebtedness
Almost all of the available data on the stock of outstanding sovereign debt, both
domestic and external, is presented at face value.2
The face value in U.S. dollars of an
outstanding and disbursed3 debt contract at time is defined to be the undiscounted sum
2
Strictly speaking, the External Debt Statistics: Guide For Compilers and Users (Bank for International
Settlements et al. 2003) recommends that countries report what is known as the nominal value of the
country’s debt. The nominal value is computed as the discounted sum of debt service on debt outstanding
and disbursed, where the discount rate is set equal to the contractual interest rate of the debt. As we will see
later, the nominal value of a debt outstanding and disbursed equals the face value of that debt. In practice,
the two terms are often used interchangeably. For example, the European statistical agency Eurostat states
that “the nominal value is considered equivalent to the face value of liabilities” (Eurostat 2010, 305). To
minimize confusion with measures of the debt stock that are or are not adjusted for inflation, we avoid the
term “nominal value.”
3
The External Debt Statistics: Guide For Compilers and Users ( Bank for International Settlements et al.
2003) defines the face value of a debt to be the sum of undiscounted future principal repayments, including
those principal payments on debt not yet disbursed, as well as principal that has already been repaid. This is
6
of any future principal repayments, or
() =
∞
X
() + (∞)
=+1
Note that, in order to preserve comparability with World Bank data, we measure the debt
stock at the end of period so that the first principal term corresponds to period + 1 In
what follows, to distinguish this concept from the measure we introduce, we will refer to this
as the contractual face value of a debt contract, denoted to capture the notion that it
is calculated using the assignment of cashflows to principal as written in the original debt
contract.
There are a number of reasons why contractual face values can be a misleading measure
of total indebtedness. Perhaps the most obvious is that two equivalent debt contracts can
have different contractual face values if they label these cashflows as amortization and interest
in different ways. Likewise, identical cashflows due at different points in time are treated
equivalently. These potential problems with the use of contractual face values to measure
relative indebtedness across countries and over time would be of little concern if the structure
of debt contracts (and hence the split of cashflows into amortization and interest, as well as
their timing) was roughly constant across countries and over time. This is far from the case in
practice. As one example, low-income countries have access to long-term loans at concessional
interest rates from creditor country governments and international institutions that result in a
greater share of cashflows being recorded as amortization compared with interest payments.4
As a result, the relative indebtedness of low-income countries may be overstated. As another
example, there has been a dramatic shift among middle-income countries over the past quarter
century away from bank loans, typically issued at par with a positive coupon, toward bonds,
which are often issued at a discount. The use of contractual face values is also problematic
when contracted interest rates vary over time. As contracted interest (coupon) rates rise, the
also sometimes referred to as the initial contractual value. It is common (for example, World Bank, various)
to report the face value of that portion of the debt that is outstanding (that is, the portion that has not been
repaid) and disbursed (so that payments associated with undisbursed debt are not included); we follow this
practice.
4
The problematic treatment of concessional lending was behind the World Bank’s move to focus on present
values of debt service in defining eligibility for debt relief (see Claessens et al. 1996; Easterly 2001).
7
cashflows associated with a par bond of a given contractual face value will rise relative to those
for a discount bond with the same contractual face value. Hence, the relative importance of
various lending instruments will vary mechanically with changing interest rates.
To measure indebtedness in a way that is invariant, within the class of equivalent
debt contracts, to the split of cashflows into principal and interest, it is necessary to treat all
cashflows as though they are divided into amortization and coupons using a common method.
Although this can be done in an infinite number of ways, we initially focus on a measure that
treats all cashflows as principal, or in other words treats all debt contracts as though they are
zero-coupon bonds.5 Specifically, we define the zero-coupon equivalent face value of a bond
contract denoted as
∞
∞
X
X
¢
¡
() =
()
() + () =
=+1
=+1
This may also be thought of as the face value of the stripped securities. Note that we do not
include cashflows that are never paid (or paid at infinity) in this definition.6
The zero-coupon equivalent face value measure has several desirable features. First,
it is invariant to differences in the contractual form (that is, the split between interest and
principal) of two equivalent portfolios of debt (that is, debts that have identical cashflows).
Second, it is the correct measure to use when comparing levels of indebtedness in the data
5
Another alternative would be to treat all bonds as though they are par bonds (as, for example, in the
U.S. since 1989 when measuring debt subject to the statutory limit). In 1997, Eurostat introduced new
accounting rules for imputing interest payments on a subset of all sovereign bonds outstanding that amounts
to measuring the principal of some discount bonds as though they were par bonds (Eurostat 1997a,1997b).
Under the new procedures, for both deep-discounted bonds (defined as bonds whose contractual coupon is
less than 50% of the corresponding yield to maturity) and zero coupon bonds, the difference between the issue
price and the face value is treated as an interest payment due at redemption. Note that discount bonds that
do not meet the deep-discount criterion are not treated equivalently. The absence of data on issue prices, as
well as our aim of constructing a measure that allows for cross-country comparisons of contractual structure,
motivates our preference for the ZCE face value measure. In the nineteenth century, Nash (1883, xiv) reports
face values of debt under the assumption that all debts took an identical contractual form and paid a 5%
coupon.
6
Undiscounted measures of debt stocks, such as the ZCE face value, return an infinite value for simple
perpetuities, such as United Kingdom consols. We do not view this as a weakness of our measure, since simple
perpetuities are typically not treated as debt and are instead grouped with common stock (for example, the
Bank for International Settlements (BIS) treats bank issued perpetuities as Tier 1 capital). The only sovereign
issued perpetuities in existence today that we are aware of are British consols and the United Kingdom is
not in our data set. France, which is also not in our data set, retired the last of its obligations perpétuelles in
1987.
8
with the levels produced by quantitative theoretical models on sovereign debt that focus
exclusively on zero coupon bonds. Third, it is conceptually similar to the contractual face
value that is conventionally used to assess sovereign indebtedness. Fourth, it is useful when
assessing the incentives of agents to vary contractual structure when creditor voting rights
and debt targets are, as a matter of convention, defined in terms of face values. Fifth and
finally, it is very simple to calculate.
However, both ZCE and contractual face values have the undesirable feature that
they do not reflect differences in the timing of cashflows. To correct this, we also present
estimates of the -coupon-equivalent ( ) face value of a bond for some positive constant
coupon rate If we let () be the face value of this synthetic -coupon bond at time
we can construct the sequence of () by utilizing the fact that the synthetic amortization payments must satisfy
( + 1) = () − ( + 1) while the synthetic
coupon payments satisfy ( + 1) = () The amortization payment sequence is
then chosen to equate these synthetic cashflows to actual cashflows, or
() + () = ()
Note that we are assuming that all cashflows are made at the end of the year. For a bond with
a finite maturity so that ( + 1) = 0 and hence ( + 1) = 0 we can recursively
substitute to find that
¶−
∞ µ
X
1
() =
()
1
+
=+1
This is a statement of a not-widely-known result that the face value of a bond paying a
constant coupon rate is equal to the present value of the cashflows of that bond discounted
at the same rate Hence, we will sometimes refer to the -coupon-equivalent face value of a
bond as its -percent present value.
One could, of course, consider a much broader class of present value of the cashflows of
a portfolio of debts with variable discount rates. If we let the discount rate between periods
− 1 and be denoted by some time-varying with implied discount factor = 1 (1 + )
9
we can calculate the present value of a debt contract denoted , as
() =
∞
X
=+1
Ã
Y
=+1
!
∞
X
¡
¢
() + () =
=+1
Ã
Y
=+1
!
()
Note that, as above, we are assuming that all cashflows are made at the end of the year, and
that we measure the present value at the end of period after period payments have been
made, so that payments scheduled for + 1 are discounted by the factor +1
Present values have the desirable feature of treating cashflows on debts occurring at
different times differently. However, like face values, present values may have some undesirable features that relate to the choice of discount rate. The choice of discount rate is
quite controversial. One possibility is to infer discount rates from market prices of debts (or
equivalently, simply calculate the market value of a portfolio of debts). In practice, there are
very few developing countries for which liquid debt markets exist. Even for countries where
some liquid debt markets exist, prices only begin to become available in the 1990s, while
many debts owed by the country–including official debts, project credits, and most bank
loans–are not traded. Moreover, market values may give an incorrect impression of the level
of indebtedness of a country and its likely future default risk. For example, if a country is
relatively likely to default in the near future, agents will typically discount future cashflows
heavily because of the default risk. Calculated using market discount rates, the present value
of the debt of the country will be low and, viewed in isolation, may give the impression that
the country is not likely to default. Dias, Richmond, and Wright (2013) describe other uses
of present values for which the choice of market discount rates would be inappropriate.
In the absence of market prices, there is considerable debate as to the appropriate
discount rate to use when calculating indebtedness. Although one could in principle use
a different discount rate at each date for each different debt issued by different countries
in different currencies and coming due at different maturities, most official organizations
and researchers discount at a constant rate. For example, the International Monetary Fund
(2004 p.61) used a 7.5% discount rate in its analysis of debt sustainability; the Development
Assistance Committee (DAC) uses a constant 10% market rate (Dikhanov 2006); Depetris
and Kraay (2005) use a 7.25% rate; and Easterly (2001, 2002) relies on the (constant) time
10
series average of London Interbank Offered Rates. Likewise, when valuing settlement offers in
the context of a debt restructuring, Andritzky (2006) finds that the most frequently applied
approach is to use a constant discount factor of around 10%. The International Monetary
Fund and World Bank (2012) is an exception in using discount rates that vary over time with
maturity and currency of issue (although not across countries). Given the interpretation of
present values computed with a constant discount rate as -percent coupon equivalent face
values and in the interest of transparency we follow the majority of researchers in applying a
discount rate that is constant across contractual forms, currencies, countries, and over time
at either 5% or 10%.
Since both ZCE and face values have their relative strengths and weaknesses, we
present estimates for both measures in Section 4. Next, we present a number of examples
to illustrate the differences between the contractual face value of a debt, its zero-coupon
equivalent value, and its -percent coupon equivalent face value (or -percent present value).
We use the examples to make three basic points. First, we illustrate the differences in
contractual face values across equivalent bonds (bonds with identical cashflows). Second, we
show that, although ZCE face values always exceed both contractual face values and
face values (as long as 0 for all ), the contractual face value of a debt may exceed or fall
below the face value of that debt. Third, we show that the differences across measures
can be very large for some bond contracts used in the quantitative theoretical literature on
sovereign debt.
One Period Discount and Par Bonds
Consider two one-period debt contracts that are both denominated in the same currency issued at time zero and coming due at time one. The first is a par bond (issued at
its contractual face value) with a positive coupon, while the second is a zero-coupon bond
issued at a discount. In the notation introduced earlier, suppressing currency subscripts
and country superscripts, the stream of payments associated with the first bond can be
represented as 1 (1) 0 and 1 (1) 0 while that associated with the second can be
represented as 2 (1) 0 and 2 (1) = 0 We assume that the two bonds are equivalent
or that 1 (1) + 1 (1) = 2 (1) and so they are valued identically by both the country
11
itself and investors. Despite being equivalent, the par bond has a contractual face value
of (0) = 1 (1) which is less than the contractual face value of the zero-coupon bond
(0) = 2 (1).
Since the two bonds are equivalent, we note that using any common discount rate
the face values of both bonds are equal and 1 (0) = (1 (1) + 1 (1)) (1 + ) =
2 (0) = 2 (1) (1 + ) In the special case where we discount each bond at its own
different contractual interest rate (in order to obtain the “nominal value” of each bond) the
face values of both bonds equal their contractual face values, and the contractual face
value is larger for the second bond (which has a zero contractual rate).
Multi-Period Bonds
The one-period examples generalize in a straightforward fashion to debts issued with a
maturity of more than one period. Consider a bond that amortizes over time in an arbitrary
way given by some { ()}=+1 , with its contractual face value at time given by
() =
X
()
=+1
Interest is paid every period at rate on the outstanding principal, so that () = ( − 1)
and hence, the ZCE face value of this debt is given by
() =
X
=+1
(1 + ( − )) ()
Obviously, debt contracts with the same amortization profile but different interest rates may
have the same contractual face value despite having different future cashflows. Likewise,
debt contracts with the same interest rate but that amortize differently may have the same
contractual face value but different cashflows.
The face value (or percent present value of this debt using constant discount
12
rate ) is given by
() =
X
=+1
=
X
=+1
− ( () + ()) =
X
=+1
¢
¡
− ( − 1) − () + ( − 1)
¢
¡
− (1 + ) ( − 1) − ()
where = 1 (1 + ) In the special case where the interest rate on the debt equals the
discount rate, or = the face value of a debt is equal to its contractual face value, so
that
X
¢
¡ −1−
() =
( − 1) − − () = ()
=+1
where the last equality follows from the fact that ( ) = 0 More generally, the contractual
face value of a debt will exceed, equal, or fall below its face value as the contractual
face value falls below, equals, or exceeds the discount rate. In contrast, ZCE face values are
always an upper bound for contractual face values.
Bonds With Exponentially Declining Cash-flows
In order to keep track of a portfolio of bonds of maturity greater than one period in a
computationally tractable way, a number of authors have proposed contractual forms in which
cashflows decay exponentially over time. For example, Chatterjee and Eyigungor (2012)
examine a class of perpetuities that pay a constant coupon rate so that () = ( − 1)
for all and amortize exponentially at rate each period, so that () = ( − 1). Such
debt contracts are “memory-less” so that debt issued at different dates can be aggregated
linearly. A portfolio of such bonds issued at time is associated with coupon payments
of (1 − )−(+1) and amortization payments of (1 − )−(+1) in all periods The
contractual face value of a portfolio of such bonds is given by
¡
¢
= + (1 − ) + (1 − )2 + =
13
and the ZCE face value is given by
¡
¢ +
= + 1 + (1 − ) + (1 − )2 + =
For the values used by Chatterjee and Eyigungor (2012), = 003 and = 005 the ratio of
ZCE face value to contractual face value for these bonds is 16 It is straightforward to show
that the face value of this debt is given by
=
( + )
+
=
1 − (1 − )
+
= =
which, if we set the discount rate equal to the contractual rate yields
As in the previous example, the relationship between contractual face value and face
value depends on the relationship between the contractual interest rate and the discount rate.
For = 01 the CE face value of such a bond is roughly half the contractual face value.
By contrast, Hatchondo and Martinez (2009) and Arellano and Ramanarayanan (2012)
examine a slightly different exponentially decaying debt contract. These contracts take the
form of a perpetuity with a coupon that decays exponentially at rate These debt contracts
are also “memory-less”. With these contracts, a debt with a contractual face value of one
issued at time pays a one unit coupon at time + 1 or ( + 1) = 1 and a (1 − )−+1
coupon, or () = (1 − )−+1 at all dates + 1 In our notation, the contractual face
value of a portfolio of such bonds is given by −
= (∞) = and its ZCE face
value is given by
¡
¢
= 1 + (1 − ) + (1 − )2 + =
−
Hence, the ratio of ZCE face value to contractual face value is given by 1 which is a 20-fold
difference for = 005. For any constant coupon rate the face value of this debt is
−
=
1+
Ã
1−
1+
+
1+
µ
1−
1+
¶2
!
+
=
+
For this contract, the contractual face value always lies below the value.
14
3
Data Sources
The statistics on external sovereign debt are derived from the World Bank’s Debtor
Reporting System and are compiled in its Global Development Finance (GDF) publication.7
The DRS has been in existence since 1951 and records detailed information at the level of an
individual loan for external borrowing. All countries that receive a World Bank loan consent
in the loan or credit agreement to provide information on their external debt. The details of
the reporting procedures are described in World Bank (2000).
One of the purposes of the DRS is to generate projections of future debt service
obligations of a country under various assumptions. Toward this end, the DRS records the
number of years to maturity, interest rate, currency of denomination, and grace period of
each debt contract at each point in time. Such detailed data are only collected for long-term
debts (debts with a maturity at issue in excess of one year); therefore, all the results that
follow correspond to long-term debt. Combining these data with forecasts for the paths of
future interest rates (for floating rate debt) and exchange rates, we can generate projections
of debt service denominated in U.S. dollars. We restrict attention to sovereign debts that are
either owed by the public sector of the country or are owed by private sector borrowers but
are guaranteed by the public sector of the country (public and publicly guaranteed).
Data on individual loans are confidential, and direct access to the DRS is restricted.
The data reported in the subsequent sections are derived from an unpublished data set
constructed by World Bank staff at our request. The World Bank ensured the confidentiality
of the loan-level data by aggregating data across multiple loans. To preserve comparability
with existing publicly available World Bank external debt statistics, we use the same interest
rate and exchange rate assumptions that were used in compiling the GDF.
Our data on cashflows begin in 1980 and end in 2007, and for each year we generate
projected cashflows over a forty-year time horizon. To preserve comparability with GDF
data, we denote the sum of cashflows from year onward as the stock of debt as of the end of
year − 1 resulting in estimates for debt stocks from 1979 through 2006. We assume that all
7
Statistics on external debt are also available from the Joint External Debt Hub, which is jointly maintained by the BIS, the International Monetary Fund (IMF), the Organisation for Economic Co-operation and
Development (OECD), and the World Bank, and combines data from the DRS with data from creditor and
market sources.
15
cashflows on a debt in period are paid at the end of the period, but before computing the
end of period stock of debt. As a consequence, the present value of a debt at time discounts
payments made in + 1
Data are available for 138 countries, although we focus on a sample of 100 countries
with data for the entire time period. An Appendix compares our results for the 100-country
sample to those for the entire data set. Data on contractual and ZCE face values, as well as
present values, of external debt for all 138 countries are available online.
4
Results
In this section, we examine the evolution of sovereign external debt, using both
the zero-coupon equivalent and -coupon equivalent face value measures and then comparing them with contractual face value measures. We begin by examining the behavior of
indebtedness–which we define as the ratio of our debt stock measures to the gross national
income (GNI) of the debtor country–at an aggregate level for all countries, emphasizing the
way in which this new measure alters our understanding of the empirical performance of the
benchmark model of sovereign debt and default. We also discuss how using our debt stock
measures change our views on the relative level of indebtedness across countries and what
the results may imply for analyses of debt sustainability. Finally, we examine how our understanding of the composition and evolution of international debt flows is changed by using
our measures.
4.A
The Level of Indebtedness
Figure 1 plots the contractual face value, ZCE face value, and face value of
external sovereign debt using both = 5% and 10%, as a percentage of GNI for our sample
of 100 developing countries. By construction, contractual face values never exceed ZCE face
values, and strikingly, ZCE face values are much larger, always exceeding contractual face
values by at least 40% and sometimes by more than 50%. Using a 10% rate, face values
are roughly 20% to 40% smaller than contractual face values, while using a 5% rate they are
roughly similar for the first decade of our sample before falling below contractual face values
16
Zero Coupon Equivalent Face Value
60%
50%
40%
Contractual Face Value
30%
20%
10%‐Coupon Equivalent Face Value
10%
5%‐Coupon Equivalent Face Value
0%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 1: The Stock of External Sovereign Debt, % of GNI
throughout the rest of the period.8 All three measures peak in 1987, with the contractual
face value of external sovereign debt at about 45% of GNI, ZCE face values at 66%, and the
10% face value at 34%.
Although all four series produce a similar picture of the evolution of developing countries’ indebtedness over the sample, the relative size of contractual face values, ZCE face
values, and face values has changed substantially. ZCE face values exceeded contractual face values by more than 50% during the Latin American debt crisis of the late 1980s,
which is the same time that indebtedness levels reached their peak. The relative difference in
levels declined substantially to just over 40% in the early 1990s, reflecting the lower interest
rates incorporated into Brady bonds, before rising back to 45% by the turn of the millennium.
8
In the data, the contractual face value of an individual country’s debt almost always exceeds its present
value discounted at 10%. The exceptions occur in the early 1980s (when interest rates were often higher
than 10%) for a set of 12 countries including Brazil and Mexico.
17
Even though overall indebtedness levels declined thereafter, the relative difference between
the series did not change much. With respect to face values, we observe that the extent
to which contractual face values exceeded them at both 5% and 10% increased in the 1990s
and 2000s as the maturities of sovereign bonds lengthened.
As noted before, the quantitative theoretical literature on sovereign debt has focused
almost exclusively on zero-coupon bonds.9 When assessing the empirical performance of
the models presented in this literature, researchers have compared the level of indebtedness
measured using the contractual face values implied by the zero-coupon bonds that are featured
in the models with the contractual face values of the more complicated portfolio of debts
observed in the data. These comparisons have invariably yielded the conclusion that the
benchmark model (with one-period debt and zero recovery rates in the event of a default)
produces equilibrium levels of indebtedness that are between 5% and 10% of GNI, which
are dramatically below the levels of indebtedness observed in the data (for all countries, but
only including long-term debt, as shown in Figure 1). The benchmark model’s equilibrium
levels of indebtedness are even further below the levels observed for middle-income countries,
which for long-term debt are typically on the order of 60% of GNI (for example, see Table 1)
rising to 80% when short term debt is included. Because these models produce debt levels
roughly five to ten times smaller than those observed in the data, many researchers have
been motivated to examine modifications of the benchmark model that deliver larger levels
of indebtedness.
The importance of researching such modifications is further emphasized once it is
understood that the models and the data have not been compared in a theoretically consistent
manner. If we compare indebtedness using the theoretically consistent ZCE face values, the
empirical performance of the benchmark model of sovereign debt and default deteriorates
further. For our sample of countries, the ratio of the ZCE face value of debt to GNI has
tended to be almost 50% higher than the contractual face value of debt to GNI. Hence, when
data on the stock of external sovereign debt are constructed using our theoretically consistent
zero-coupon equivalent face value measure, the benchmark model produces levels of the stock
9
See, for example, Arellano (2008), Aguiar and Gopinath (2006), Yue (2010), Tomz and Wright (2007),
and Benjamin and Wright (2008).
18
of sovereign debt between 7.5 and 15 times smaller than those observed in practice.
Our data also call into question the success of recent modifications of the benchmark
model aimed at matching observed levels of indebtedness. One type of modification keeps
one-period debt but allows for nonzero recovery rates for creditors following a default. The
resulting debt levels are closer to the data on contractual face values, ranging from 10% of
GNI (Yue 2010), to 20% (Bi 2008), 45% (D’Erasmo 2007), and up to 80% (Benjamin and
Wright 2008). That is, all but one fall short of the observed 80% levels that result from
including short-term debt and measuring the stock of long-term debt using the theoretically
consistent ZCE face values. A second modification sets recovery rates to zero but allows for
longer maturity debt as discussed in the earlier examples. Measuring with ZCE face values
increases the model-generated data on debt stocks. However, this does not unambiguously
improve the fit of these models to the data. Hatchondo and Martinez (2009), for example,
report levels of the contractual face value of debt from their model as roughly 10% of GNI
when their output cost of default parameter is set to 10%. For their model, the relevant
ZCE face values, however, are on the order of 200% of GNI. Likewise, whereas Chatterjee
and Eyigungor (2012) produce a 70% ratio of contractual face value of debt to GNI, which is
quite close to the ZCE face value data, the corresponding model-generated ZCE face values
are in excess of 110% of GNI.
4.B
Relative Indebtedness and Indicators of Debt Sustainability
Contractual face values have long been used to construct indicators of debt repay-
ment difficulties. For example, until the mid-1990s, the World Bank classified countries as
“highly indebted”–and hence potentially eligible for debt relief–if, among other indicators,
the ratio of the contractual face value of the country’s external debt to gross domestic product10 (GDP) exceeded 50%. When debt stocks are recomputed using either ZCE or
face values, absolute levels of indebtedness change, rendering the 50% threshold less significant. Importantly, the ranking of countries by levels of indebtedness also changes, suggesting
that some deserving countries were denied debt relief despite being more indebted than the
10
We follow World Bank (various) in reporting debt as a percentage of GNI, rather than GDP. For most
countries, the difference between GNI and GDP is small.
19
1990 Debt/GNI (%)
Face Values: Contractual ZCE 5CE 10CE
Countries Designated “Highly Indebted”
Comoros
55.3
66.1 35.8 23.5
Ghana
50.2
61.2 31.2 20.0
Philippines
54.2
81.1 58.3 44.4
Senegal
56.4
71.6 44.3 32.0
Uganda
50.6
60.5 33.3 22.7
Countries Designated “Moderately Indebted”
Argentina
37.8
61.0 43.6 32.8
Bulgaria
49.6
60.2 52.2 46.0
Cameroon
46.9
62.5 45.7 35.6
Mexico
31.8
67.2 36.8 24.5
Solomon Islands
49.4
58.3 35.2 25.2
Table 1: Relative Indebtedness Levels in 1990
recipients of debt relief.
Table 1 illustrates the changes in rankings by tabulating the debt-to-GNI ratios with
our debt stock measures for a subset of those countries that were just above the 50% contractual face value threshold in 1990 (when the threshold was used by the World Bank in
awarding the highly indebted designation). The table also does this for another subset of
nations whose rankings increase significantly when either ZCE or face values are used.
The most dramatic change in rankings is for Mexico whose contractual face value of debt only
just exceeded the 30% threshold of a “moderately indebted” country in 1990, but whose ZCE
face value of 67.2% exceeds the ZCE face values of Comoros, Uganda, and Ghana, which were
all designated as highly indebted. A similarly large adjustment occurs for Argentina which,
like Mexico, borrows at non-subsidized (and hence higher) interest rates. Dramatic changes
in rankings also result if face values are used. For example, Ghana is just above, and
Bulgaria just below, the contractual face value threshold for being considered highly indebted,
but when we use the 10%-CE measure, we observe that the debt stock of Ghana is less than
half that of Bulgaria. Likewise, the Solomon Islands were classified as moderately indebted
in 1990 even though its contractual face value of debt, relative to GNI, was slightly less than
that of highly indebted Uganda. Although this ranking is preserved using ZCE face values,
the Solomon Islands rank as more indebted using either face value measure.
20
The World Bank has since moved away from the use of contractual face values toward
present discounted values of debt service when designating countries as highly indebted.
This was motivated by the issue, discussed earlier, that contractual face values are misleading
indicators of relative indebtedness when some countries have access to subsidized concessional
financing (see Claessens et al. 1996; Easterly 2001). However, the absence of widely available
data on the present value of domestic sovereign debt or on the subcomponents of external
sovereign debt has meant that researchers have continued to focus on thresholds defined
in terms of contractual face values. For example, Reinhart and Rogoff (2010) study the
relationship between economic growth and the contractual face value of both external and
internal debt and find that when its ratio to GDP rises above 90%, growth declines by more
than 1% per year on average. Moreover, for emerging market countries, when external debt
alone exceeds 60% of GDP, the annual growth rate declines by about 2%. This finding has
since become the starting point for a number of other studies of the relationship between
indebtedness and economic growth (Irons and Bivens 2010; Kumar and Woo 2010) and has
since become quite controversial (see Dube 2013, Herndon, et al 2013, Nersisyan and Wray
2010, Panizza and Presbitero 2013, and the response in Reinhart and Rogoff 2013).
Table 2 shows how the ordering of some countries in the neighborhood of the 60%
external-debt-to-GNI threshold changes when their external indebtedness is measured using
ZCE or face values for the last year of our data. The table identifies two countries–
Panama and Uruguay–whose contractual face values leave them under the threshold, but
whose ZCE face values place them in line with other countries that were previously above
that threshold. The same is true when countries are ranked by the face value of their
debts; indeed, according to the face value measure, Panama and Uruguay are more
indebted than Guinea and Sierra Leone.
4.C
The Evolving Composition of External Sovereign Debt
The extent to which estimates of indebtedness calculated using contractual face values
differ from those calculated using face values depends on the evolving mix of borrowing instruments used in international debt markets, changes in world interest rates, and the
21
2006 Debt Face Value/GNI
Face Value: Contractual ZCE 5CE
Countries Above Threshold
Dominica
66.9
87.1 60.1
Guinea
73.3
85.6 50.0
Jamaica
62.2
103.9 73.5
Sierra Leone
70.0
79.3 41.4
Countries Below Threshold
Panama
48.5
105.4 60.0
Uruguay
44.7
90.7 53.6
(%)
10CE
45.3
33.8
56.2
25.8
40.1
36.4
Table 2: Relative Indebtedness Levels in 2006
changing circumstances of a country as reflected in country risk. As a consequence, relative
to measurements using contractual face values, measurements using face values paint
a quantitatively, and in some cases also qualitatively, different picture of the evolving composition of the market for sovereign debt. In this subsection, we explore those differences
focusing on the changing performance of different debt instruments, different regions, and
different income groups of countries.
Debt Instruments
Figure 2 plots the ratio of contractual face values to ZCE face values for the five sets
of borrowing instruments that make up the stock of the world’s sovereign external debt. As
shown in the Figure, the ratio of the two face values has increased steadily over time for
both official lending categories as well as the other private category (which includes, among
other things, long-term trade credit). The ratio for commercial banks loans has also increased
over time, although there were large decreases in the late 1980s, late 1990s, and early 2000s,
reflecting the changes in contractual interest rates on commercial bank loans. The largest
changes occur for commercial bond lending, where the ratio fell from around 70% in 1985 to
roughly 45% in 1990, before stabilizing at roughly 55% thereafter. Set against the examples
in Section 2, this is initially surprising, since bonds issued at a discount should, everything
else equal, have higher ratios of contractual face values to ZCE face values than equivalent
loan contracts issued at par. However, this is offset by the fact that the increase in bond
lending was driven primarily by bonds issued by middle-income countries at higher interest
22
90%
Official Multilateral
Lending
80%
Other Private
Lending
Official Bilateral
Lending
70%
Commercial
Bank Loans
60%
50%
Bonds
40%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 2: Ratio of Contractual Face Values to ZCE Face Values, by Instrument
rates. Likewise, Figure 3 plots the ratio of contractual face values to 10CE face values for
the five sets of borrowing instruments. As shown in the Figure, all ratios are above 100%,
except for commercial bank loans during 1980 and 1981 when contractual interest (coupon)
rates often exceeded 10%.
Table 3 describes the composition of sovereign debt for our sample of developing countries using all three debt stock measures. The high average interest rates on private lending
to sovereign countries results in higher shares for private lending when computed using either
Face Value:
Contractual
ZCE
10CE
1980 1990 2000 1980 1990 2000 1980 1990 2000
Official Lending
43.9 57.9 57.6 39.7 51.2 50.4 31.0 50.6 50.6
30.4 33.9 29.6 26.9 29.4 26.1 21.3 29.6 26.4
(i) Bilateral
(ii) Multilateral
13.5 24.0 28.0 12.8 21.7 24.3 9.7 20.9 24.3
Private Lending
56.1 42.1 42.4 60.3 48.8 49.6 69.0 49.4 49.4
(i) Commercial Banks 36.8 20.6 11.8 42.5 23.6 12.7 49.0 26.1 13.1
4.3 11.1 26.1 4.1 16.3 32.9 4.4 11.6 31.2
(ii) Bonds
(iii) Other
15.0 10.4 4.5 13.8 9.0
4.0 15.6 11.8 5.0
Table 3: Shares of Total Debt by Instrument
23
200%
Official Multilateral
Lending
190%
180%
170%
160%
150%
140%
130%
Official Bilateral
Lending
Other Private
Lending
120%
Bonds
110%
100%
Commercial
Bank Loans
90%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 3: Ratio of Contractual Face Values to 10CE Face Values, by Instrument
ZCE or 10CE face values relative to contractual face values. While private sector lending to
sovereign countries had fallen to 42.4% by 2000 as measured using contractual face values,
private sector lending still accounted for 49.6% and 49.4% of lending when measured using
ZCE or 10CE face values, respectively. These results were driven almost entirely by the
growth in sovereign bond lending, whose share of total debt was larger by 6.8 percentage
points in 2000 when shifting from using contractual to ZCE face values and by 5.1 percentage
points when shifting from using contractual face values to 10CE face values.
Regions
Shifting from using contractual face values to ZCE or face values also changes the
composition of sovereign debt across regions. As shown in Figure 4, Latin America and the
Caribbean experiences the largest increase in debt, with the ratio of contractual face values
to ZCE face values always below 70% and even dropping below 55% at the beginning of the
1990s. This reflects the greater dependence on credit provided by private sector lenders at
higher interest rates to countries in this region (relative to most other nations). The ratio
24
90%
Middle East and
North Africa
80%
Sub‐Saharan
Africa
South Asia
70%
Europe and
Central Asia
East Asia and
Pacific
60%
Latin America and
Caribbean
50%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 4: Ratio of Contractual to ZCE Face Values by Region
of ZCE face values to contractual face values is typically low for countries in Sub-Saharan
Africa reflecting their tendency to borrow from official creditors, often at concessional rates.
Table 4 presents the share of total outstanding debt owed by each of the World Bank’s
six regional groupings of developing countries for three of our debt stock measures. Latin
America accounts for an additional 5.2% of developing countries’ external sovereign debt
when measured with ZCE face values and for an additional 5.6% when measured with 10CE
face values.
Income Levels
As shown in Table 5, similar patterns emerge when we group countries by national
income level. The differences between contractual face values and ZCE or face values
are smallest for high-income countries that are able to borrow at the lowest interest rates.
The differences are largest for middle-income countries, with the share owed by upper-middleincome countries higher by roughly 5 to 7 percentage points when ZCE or face values
are used instead of contractual face values to measure shares of total debt. Consequently, the
25
Face Value:
Contractual
ZCE
10CE
1980 1990 2000 1980 1990 2000 1980 1990 2000
Latin America & Caribbean 43.4 33.5 36.7 46.5 40.5 41.9 50.7 38.2 42.3
South Asia
10.6 13.5 11.8 8.9 11.4 11.0 5.4
9.6
9.2
East Asia & Pacific
10.5 17.3 22.3 10.3 16.3 20.4 10.2 17.1 22.3
Europe & Central Asia
8.6 10.7 8.7
9.0 10.1 8.4
9.5 11.9 9.4
Middle East & North Africa 14.9 11.7 7.9 14.6 10.3 6.9 13.6 11.8 7.6
Sub-Saharan Africa
12.1 13.3 12.7 10.7 11.4 11.5 10.6 11.3 9.3
Table 4: Shares of Total Debt by Region
Face Value:
Contractual
ZCE
10CE
1980 1990 2000 1980 1990 2000 1980 1990 2000
High-Income
2.6
2.6
1.7
2.7
2.3
1.5
3.1
3.0
2.0
Upper-Middle-Income 53.6 43.5 44.9 56.3 49.9 49.6 61.9 49.7 51.8
Lower-Middle-Income 36.2 45.4 45.9 34.3 40.8 42.9 29.5 41.5 42.0
Low-Income
7.8
8.5
7.4
6.6
7.0
6.0
5.6
5.8
4.2
Table 5: Shares of Total Debt by Income Level
shares of total debt for lower-middle and low-income countries are lower. The low-income
countries experience the greatest decline when we move to using face values because
most of their borrowing is at long maturities from official lenders.
5
Contractual Face Values and Public Policy
In this section we point to two areas where the focus on contractual face values gives
market participants an incentive to vary the contractual terms of debt issuance and where
this may affect the outcomes of changes in international economic policy. We begin with a
discussion of the role of face values in determining voting rights in the event of a sovereign
debt restructuring; we also examine how this factor may be compounded by recent proposals
for expanded use of collection action and aggregation clauses in sovereign debt contracts.
We then turn to a discussion of the ways in which countries vary their debt issuance when
confronted with fiscal rules that are written in terms of contractual face values, or otherwise
treat future interest and principal payments in asymmetric ways.
26
5.A
Face Values and Sovereign Debt Restructuring Negotiations
The distinction between principal and interest can be important when sovereign debts
are restructured. Since 2003, emerging market sovereign bonds issued under New York law
have included collective action clauses, which specify the conditions under which the terms
of the bond may be changed. As one example of such a clause, Brazil’s 10.25% Global
BRL Bonds due in 202811 specifies that “the holders of not less than 85% (in the case of
Collective Action Securities designated “Type A” or having no designation as to “Type”) or
75% (in the case of Collective Action Securities designated “Type B”) in aggregate principal
amount of the outstanding debt securities of that series, voting at a meeting or by written
consent, must consent to any amendment, modification, change or waiver with respect to”
(emphasis added), among other things, repayment terms. That is, voting rights in the event
of a restructuring are allocated in proportion to a debt’s contractual face value.
If all debts covered by a collective action clause are identical–and in practice, collective action clauses apply only to a single debt issue–allocating voting rights in proportion to
contractual face values will produce the same outcomes as allocating voting rights in proportion to ZCE or face values. However, if something similar to a collective action clause
is applied to different debt contracts that divide future cashflows into interest and principal
in different ways or are issued at different maturities, the way voting rights are allocated
can change voting outcomes. As one example, allocating voting rights in proportion to ZCE
face values instead of contractual face values would increase the voting power of the holders
of low-face-value-high coupon debts over those of the holders of equivalent high-face-valuelow-coupon debts. Similarly, the holders of short-term debt would have more voting rights
than the holders of long-term debt if voting rights were allocated in proportion to face
values rather than contractual face values. As a consequence, if voting rights continue to be
awarded on the basis of contractual face values, creditors have an incentive to demand debt
securities with a low coupon and a long maturity in order to maximize voting power for a
given financial exposure.
Collective voting to restructure a portfolio of sovereign debts is increasing in impor11
See http://www.sec.gov/Archives/edgar/data/205317/000119312510234571/d424b5.htm.
27
tance over time as aggregation clauses–clauses that group together different debt securities
in the event of a renegotiation of sovereign debt–become more widespread. A number of
nations are now following the example of Uruguay which, in 2003, was the first country to
issue bonds containing aggregation clauses12 , and Greece which, in its recent debt restructuring, amended domestic law sovereign bonds by legislation to include aggregation clauses
(Zettelmeyer, Trebesch and Gulati 2013). This number is expected to grow. In Europe, for
example, the Eurogroup statement of November 28, 2010 (Eurogroup 2010) commits its members to introduce, starting in 2013, “aggregation clauses allowing all debt securities issued
by a Member State to be considered together in negotiations” (Eurogroup 2010; emphasis
added). Proposals to introduce similar aggregation clauses in non-euro-area sovereign bonds
have also been discussed in policy circles (International Monetary Fund 2002). Interpreting
this policy broadly, we note that future debt restructuring negotiations would then involve
negotiations across a very diverse set of debt instruments, such as debts issued by both official
and private sector creditors and by both banks and bondholders, as well as debts issued at
different maturities and in different currencies under different governing laws. As a result of
this diversity, shares of total contractual face value are unlikely to be representative of the
relative financial exposure of different creditors.
To obtain a sense of the practical significance of this issue, suppose that all debt
securities were modified to contain aggregation clauses and that otherwise the contractual
forms of countries’ debts remain the same as their level in 2006. If we restrict attention
to sovereign debt owed to private sector creditors, one potential source of conflict lies in
the competing interests of banks and bondholders. Table 6 collects the countries for which
allocating voting rights in proportion to contractual face values would likely have yielded
different results in a restructuring where voting rights were allocated in proportion to ZCE or
face values. With a simple majority voting threshold, the holders of Mexico’s sovereign
bonds would hold a minority share calculated in terms of its contractual face value despite
12
Uruguay’s May 2003 issue of 10.50% bonds due 2006 contained a clause allowing it to modify the payment terms of two or more securities if “the holders of not less than 85% in aggregate principal amount of the outstanding debt securities of all series that would be affected by that modification (taken in aggregate), and ...
66-2/3% in aggregate principal
amount of the outstanding debt securities of that series (taken individually)” agree.
(See
http://www.sec.gov/Archives/edgar/data/102385/000095012303011424/y90432b5e424b5.htm#026).
28
Bonds/Total
Face Value: Contractual ZCE
75% Threshold
Barbados
77.3
73.6
Chile
73.5
78.3
Seychelles
71.8
76.7
50% Threshold
Mexico
45.2
51.9
Private
5CE 10CE
71.9
74.0
75.0
70.9
71.3
73.3
48.4
47.0
Table 6: Bondholders vs Other Private Creditors in 2006
being more exposed in the sense of holding a majority of the ZCE face value of the stock
of debt. Even with a 75% threshold, bondholders would possess the relevant supermajority
by moving to voting rights based on ZCE face values in the cases of Chile and Seychelles.
Somewhat surprisingly, a move to allocating voting rights based on ZCE face values would
lead bondholders to lose their supermajority in the case of Barbados. The same holds true if
voting rights are allocated in proportion to either the 5CE or 10CE face values of Barbados’s
sovereign debt.
Interpreted literally, the Eurogroup statement may be taken to mean that official
creditors will be subject to the same aggregation clauses as private sector creditors in future
debt restructuring negotiations. To what extent is there potential for conflict between private
sector creditors (who are presumably motivated solely by a concern for profits) and official
creditors (who may also be motivated by concerns for equity)? In theory, there should be little
conflict: Multilateral official loans have historically been de facto senior, and the restructuring
of bilateral official loans is in theory predicated on private sector creditors receiving equal or
inferior treatment. However, it is not clear that this is true in practice.
To assess the possibility for voting conflict, we collect in Table 7 a number of cases in
which a change from allocating voting rights based on contractual face value to either ZCE
or face value would affect the ability of the official sector to obtain a supermajority or,
alternatively, prevent the private sector from obtaining a supermajority. Of the 100 countries
in our balanced sample, official creditors possess a simple majority by contractual face values
in 80 cases, and possess a 75% super-majority in 66 cases. In all eleven cases in Table 7, a
move to voting rights based on ZCE face values would lead to the official sector either losing
29
Face Value:
75%
Brazil
Dominica
Malta
Turkey
Uruguay
66%
Grenada
St. Lucia
50%
Ecuador
El Salvador
Philippines
St. Vincent & Gr.
Official/Total
Contractual ZCE 5CE 10CE
Threshold
30.3
21.0 24.7 26.7
76.3
71.3 71.0 71.3
31.3
19.2 25.8 31.0
30.7
24.4 27.5 29.6
31.3
21.2 26.6 30.5
Threshold
46.3
27.1 31.0 35.8
68.0
65.5 61.2 58.6
Threshold
57.8
43.6 51.5 56.6
58.3
41.1 49.9 55.4
50.7
40.6 42.4 43.8
50.8
49.9 46.8 45.0
Table 7: Official vs Private Creditors in 2006
its majority or supermajority, or losing its ability to prevent private sector creditors from
reaching a majority or supermajority. For the same eleven cases, a move to voting rights in
proportion to either 5CE or 10CE face values would decrease the voting power of the official
sector, although it only changes the ability to reach or block a majority or supermajority in
four cases at 10% and seven cases at 5%.
Taken together, these results suggest that more widespread adoption of broad aggregation clauses with voting rights based on contractual face values would lead to the effective
subordination of private sector claims. This may, in turn, partly explain the reluctance of
private sector creditors to participate in bond issues with aggregation clauses and such bonds’
favor with policymakers. However, these calculations also suggest that, should the official
sector succeed in encouraging widespread adoption of broadly defined aggregation clauses,
private sector creditors will have an incentive to adopt contractual forms (such as zero-coupon
bonds) that maximize the contractual face value of their claims and so maximize their voting
power in the event of a restructuring.
30
5.B
Manipulation of Fiscal Statistics
Limits on a government’s stock of debt or budget deficit are common. Examples
include the debt stock limits of the U.S. and Denmark, the budget deficit and debt stock
restrictions imposed by the Maastricht Treaty on European Union (EU) countries, and the
fiscal targets imposed as part of IMF Stand-By lending arrangements. One of the most
common forms of manipulation occurs when principal and interest are treated asymmetrically
in the relevant statistical targets, allowing governments to manipulate the contractual form
of new debt issuance to meet specific targets and disguise an underlying deterioration in the
country’s fiscal position (see the discussion in Easterly 1999, Piga 2001, Milesi-Ferretti 2004,
and Koen and van den Noord 2005).
The asymmetric treatment of interest and principal in fiscal targets is common. For
example, the Excessive Deficits Procedure of the Maastricht Treaty specifies a debt threshold
of 60% of GDP where “debt means total gross debt at nominal value outstanding at the end
of the year and consolidated between and within the sectors of general government” (Article
2.d) and where “the nominal value is considered equivalent to the face value of liabilities”
(Eurostat 2010, 305). Likewise, the U.S. debt ceiling is written in terms of the contractual
face value of U.S. sovereign debt, with the relevant law stating as of December 2012 that “the
face amount of obligations issued under this chapter and the face amount of obligations whose
principal and interest are guaranteed by the United States Government (except guaranteed
obligations held by the Secretary of the Treasury) may not be more than $16,394,000,000,000
outstanding at one time” (31 U.S.C. § 3101(b)).
Sometimes, statistics on debt feature imputed face values that limit manipulation.
For example, in the U.S. in 1989, following the December 1987 announcement of plans to sell
zero-coupon U.S. Treasury securities to Mexico with a contractual face value of $10 billion
at a price of $2 billion, the statute governing the debt ceiling was amended so that the
face value of U.S. debts issued at a discount or premium are imputed by their issue price.13
As another example, in the early years of the Maastricht Treaty, changes in the relative
issuance of low-face-value, high-coupon debt and high-face-value, low-coupon debt by EU
13
The adjustment appears in Treasury documents as “unamortized discount” (or “unamortized premium”).
See Special Analysis E of the 1989 budget, pages E-30 to E-32, and 31 USC § 3101(c).
31
governments to hit either debt stock or fiscal deficit targets were common; Koen and van der
Noord (2005) document more than twenty cases in which the treatment of interest payments
in the fiscal accounts by EU countries was questionable. In response to concerns about the
manipulation of debt and budget statistics, Eurostat introduced new rules in 1997 requiring
the imputation of interest payments on zero coupon debts and other “deeply discounted”
bonds so that measured principal and interest payments for these classes of debt contracts
would be treated symmetrically with debts issued at par (Eurostat 1997a,1997b).
The Eurostat imputation, however, is imperfect in that it only applies to deeply discounted bonds and hence only removes the incentive to grossly understate interest expenditures. It does not remove the incentive to understate debt levels (and hence overstate interest)
through the issuance of low-face-value, high-coupon debt. In perhaps the best known example, the Italian Treasury reduced the contractual face value of the stock of government debt
by 1.9 percentage points of GDP in 2002 by swapping long-term bonds with a low coupon
for bonds with a lower face value and higher coupon with the Banca d’Italia (Koen and van
Noord 2005, 12—13). In another example, this time from the market for U.S. municipal debt,
roughly 200 school districts in California circumvented caps on debt issuance at contractual
face value by issuing high-coupon, low-face-value debt at a substantial premium to par.14
Another example of the asymmetric treatment of interest and principal in fiscal targets
comes from IMF Stand-By Arrangements with Argentina throughout the 1990s.15 The 1991
Stand-By Arrangement targeted the cash balance of the government (which included interest
payments) as well as the face value of the stock of outstanding disbursed external debt
(International Monetary Fund 1991). By contrast, the 1996 Stand-By Arrangement targeted
fiscal expenditures excluding interest payments on debt (International Monetary Fund 1996;
see also Independent Evaluation Office of the International Monetary Fund 2004). As a
consequence, starting in 1996 Argentina had an incentive to switch to issuing low-face-value,
14
See the discussion in “The Poway Deal gets Fishier” by Felix Salmon, Reuters, September 26th 2012;
“Risky Bonds Tie Schools to Huge Debt” by Dan Weikel, Los Angeles Times, November 29th 2012; and
“Poway not Alone in Issuing Capital Bonds: 41 other Borrowings Across California Have More Costly Repayment Ratios” by Matt Clarke, Union Tribune San Diego, November 29th 2012.
15
Other cases no doubt exist. Easterly (1999, 2001) states that Brazil issued zero-coupon debt in 1998 so
as to understate current interest expenditures. However, we have been unable to uncover any other sources
of information on this episode.
32
60%
40%
Bonds
20%
Other Lending
0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
Figure 5: Interest Payments as a Share of ZCE Face Values for Argentine Deutsche MarkDenominated Debt
80%
Bonds
60%
40%
20%
Other Lending
0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
Figure 6: Interest Payments as a Share of ZCE Face Values for Argentine U.S. DollarDenominated Debt
33
high-coupon debt in order to meet the IMF targets for noninterest expenditures.
Our database shows that Argentina responded to this incentive. Figures 5 and 6 plot
the ratio of the undiscounted sum of future interest payments to the contractual face value
of outstanding debt, by instrument, for both Deutsche mark- and U.S. dollar-denominated
Argentine external sovereign debt. Both figures show that, starting in 1996, the share of
cashflows labeled interest jumps dramatically. Moreover, this pattern is not repeated for
other classes of debt instrument, suggesting that it does not reflect some other change in the
environment affecting Argentine borrowing.
It is important to stress that a target written in terms of ZCE face values would only
eliminate the incentive to vary contractual form (the split of interest and principal) to meet
the target. Sovereign’s would still have an incentive to shorten the maturity of their debt
issuance–which would raise more revenue from the same face value of debt–to understate
the face value of their debt. While a target based on face values might help partially
mitigate this incentive, it would not eliminate possibilities for manipulation as long as the
discount rates used to construct the target differ from the discount rates encoded in market
prices; if so the country can issue debts at any maturity that is discounted less by the market
than the statistical target. Targets constructed using discount rates derived from market
prices are also not immune from manipulation; a sovereign can always issue debt to a point
where default becomes likely enough that the market value of the debt is small relative to the
target. In summary, any statistical target can be manipulated. However, the conventional
way of writing targets written in terms of contractual face values is particularly easy to
manipulate relative to targets written in terms of either ZCE or face values.
6
Conclusion
Data on the stock of sovereign debt is typically presented at contractual face value.
Defined as the undiscounted sum of future principal repayments, contractual face values
can paint a misleading picture of indebtedness because they treat debts with identical total
cashflows differently if they have different contractual forms (that is, if the debts have these
cashflows divided into principal and interest in different ways) and also treat debts with
different cashflows, due to issuance at different maturities, identically. In this paper, we
34
present new measures of the stock of external sovereign debt for 100 developing countries from
1979 through 2006. The first measure–the zero-coupon equivalent face value–is designed
to be invariant to contractual form (the split of cashflows into interest and principal) across
equivalent debt contracts (debts with identical cashflows) and is new. The second measure–
the -coupon equivalent face value–turns out to be identical to the present value of a debts
cashflows discounted at −percent, and is designed to correct for differences in the timing
over which cashflows are made.
We found that using either ZCE or face values (instead of contractual face values)
paints a very different quantitative picture, and in some cases also a different qualitative picture, of the stock of developing countries’ external sovereign debt. For example, according to
our measures, the countries of Latin America and the Caribbean are relatively more indebted
than countries in other regions because of their access to market sources of funding, which
charge higher interest rates relative to official sources. Also, the low-income countries are
relatively less indebted because they borrow at subsidized interest rates and at long maturities from official sources. The rankings of individual countries in terms of their indebtedness,
which historically was used as a criterion for eligibility for debt relief, can also change significantly when our debt stock measures are applied. For example, Mexico, which was classified
as moderately indebted by the World Bank in 1990 based on the total stock of external sovereign debt at contractual face value, is more heavily indebted than some countries that were
classified as highly indebted, when indebtedness is measured using either of our measures.
Our zero-coupon equivalent face value measure is particularly useful for comparing the
data with the predictions of the growing quantitative theoretical literature on sovereign debt
that typically assumes that all debts take the form of zero-coupon bonds. As is well known,
models in this literature produce zero-coupon face value of debt levels that are between
5 and 10 times smaller than the contractual face value debt stock data available. When
our theoretically consistent zero-coupon equivalent face value measure is used, the empirical
performance of these models deteriorates, with model generated debt levels between 7.5 and
15 times smaller than those observed in the data.
Finally, we pointed to the incentives for both creditors and debtors to manipulate the
contractual structure of debts given the emphasis on contractual face values. For creditors,
35
voting power during debt restructuring negotiations is in proportion to contractual face values. As aggregation clauses–which combine different debt instruments for the purpose of
one restructuring–in debt instruments become more widespread, creditors holding greater
amounts of debt at contractual face values will therefore possess a voting advantage. Using
our data, we establish that this has the potential to effectively subordinate private sector
bondholders. Similarly, we show that debtors have an incentive to manipulate their debt
statistics when they are evaluated on measures that emphasize principal repayments (such
as contractual face values) or that emphasize interest payments, and use our data to make a
prima facie case for manipulation by one country in our data set.
The paper points to the desirability for further work in at least three directions. First,
in the light of a surge of recent interest, it would be desirable to construct similar measures
for the stock of domestic sovereign debt. Second, as emphasized earlier, our paper has
nothing to say about the desirability or appropriateness of different methods for discounting
cashflows to arrive at an appropriate valuation for the stock of external sovereign debt. In
a companion paper (Dias, Richmond, and Wright 2013), we show theoretically that the
appropriate discount rate will vary according to the purpose for which the resulting measure
will be used. We also present several methods for implementing the implications of that
theory. Third and relatedly, our paper only briefly touches on the maturity structure of
external sovereign debts, which has been a topic of recent academic and policy interest. In
future work, we aim to use our data to construct a comprehensive set of estimates of the
maturity of external sovereign debts, disaggregated by country, instrument, and currency of
issue, which we will then use to discipline the existing models of the maturity structure of
external sovereign debt.
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7
Appendix A: Country List
In our calculations we used a subset of the countries that are present in our data set.
The reason was that we wanted to use a balanced panel in order to avoid potential attrition
problems. In the original data set there are 138 countries, while our sample contains 100 of
those countries. Table 8 lists the 100 countries. In Appendix C, we show that our results are
qualitatively similar when we use the full set of 138 countries.
Note: The region and income level identifiers are defined as follows. Region: EAP
= East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and
Caribbean; MENA = Middle East and North Africa; SA = South Asia; SSA = Sub-Saharan
Africa. Income: LI = Low-Income; LMI = Lower-Middle-Income; UMI = Upper-MiddleIncome; HI = High-Income.
8
Appendix B: Comparison To World Bank Published Data
Earlier we claimed that our data, when aggregated, almost exactly replicates the
publicly available data that is published by the World Bank. In this appendix our goal is to
41
Country
Region
Inc.Group
Country
Region
Inc.Group
MENA
UMI
El Salvador
LAC
LMI
LAC
UMI
Equatorial Guinea
SSA
HI
SA
LI
Ethiopia
SSA
LI
Barbados
LAC
HI
Fiji
EAP
UMI
Belize
LAC
LMI
Gabon
SSA
UMI
Benin
SSA
LI
Gambia, The
SSA
LI
Bolivia
LAC
LMI
Ghana
SSA
LI
Botswana
SSA
UMI
Grenada
LAC
UMI
Brazil
LAC
UMI
Guatemala
LAC
LMI
Bulgaria
ECA
UMI
Guinea
SSA
LI
Burkina Faso
SSA
LI
Guinea-Bissau
SSA
LI
Burundi
SSA
LI
Guyana
LAC
LMI
Cameroon
SSA
LMI
Haiti
LAC
LI
Cape Verde
SSA
LMI
Honduras
LAC
LMI
Central Afr. Republic
SSA
LI
Hungary
ECA
HI
Chad
SSA
LI
India
SA
LMI
Chile
LAC
UMI
Indonesia
EAP
LMI
China
EAP
LMI
Jamaica
LAC
UMI
Colombia
LAC
UMI
Jordan
MENA
LMI
Comoros
SSA
LI
Kenya
SSA
LI
Congo, Dem. Republic
SSA
LI
Lesotho
SSA
LMI
Algeria
Argentina
Bangladesh
Congo, Republic
SSA
LMI
Liberia
SSA
LI
Costa Rica
LAC
UMI
Madagascar
SSA
LI
Cote D’Ivoire
SSA
LMI
Malawi
SSA
LI
Djibouti
MENA
LMI
Malaysia
EAP
UMI
Dominica
LAC
UMI
Maldives
SA
LMI
Dominican Republic
LAC
UMI
Mali
SSA
LI
Ecuador
LAC
LMI
Malta
ECA
HI
MENA
LMI
Mauritania
SSA
LI
Egypt
Table 8: List of countries used in the calculations
42
Country
Region
Inc.Group
Mauritius
SSA
UMI
Mexico
Country
Region
Inc.Group
Sierra Leone
SSA
LI
EAP
LMI
SA
LMI
LAC
UMI
Solomon Islands
MENA
LMI
Sri Lanka
Mozambique
SSA
LI
St. Kittis and Nevis
LAC
UMI
Nepal
SA
LI
St. Lucia
LAC
UMI
Nicaragua
LAC
LMI
St. Vincent and Gre.
LAC
UMI
Niger
SSA
LI
Sudan
SSA
LMI
Nigeria
SSA
LMI
Swaziland
SSA
LMI
Oman
Morocco
MENA
HI
MENA
LMI
Pakistan
SA
LMI
Syria
Tanzania
SSA
LI
Panama
LAC
UMI
Thailand
EAP
LMI
Papua New Guinea
EAP
LMI
Togo
SSA
LI
Paraguay
LAC
LMI
Tonga
EAP
LMI
Peru
LAC
UMI
Trinidad and Tobago
LAC
HI
Philippines
EAP
LMI
Tunisia
MENA
LMI
Poland
ECA
UMI
Turkey
ECA
UMI
Rwanda
SSA
LI
Uganda
SSA
LI
Samoa
EAP
LMI
Uruguay
LAC
UMI
Sao Tome & Principe
SSA
LMI
Vanuatu
EAP
LMI
Senegal
SSA
LI
Venezuela
LAC
UMI
Seychelles
SSA
UMI
Zambia
SSA
LI
Table 8: List of countries used in the calculations (continued)
43
50%
40%
Our data
30%
GDF data
20%
10%
0%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 7: Comparing Publicly Available Data with our Data–Aggregate Values. Units: %
of GNI.
provide evidence supporting this claim.
In Figure 7, we compare some of our data with the data that is publicly available in the
World Bank’s Global Development Finance data set. As it is visible in Figure 7, the differences
between the two series are very small, which shows that, at least at the aggregate level, our
data is very similar to the data that is publicly available. Our data tend to systematically
produce higher values for the debt stocks than those based on publicly available data, but the
correlation between the two series is 99.2%. This comparison is only done for those countries
that we used in our analyses and for which there are publicly available data.
Because we focus much of our analysis on the composition of debt in terms of instrument and also on the geographical distribution of debt stocks, we also provide some
comparisons between our data and the data that is publicly available. Tables 9 and 10 show
that there are some differences between our data and the data that is publicly available, but,
these differences do not affect our main results.
There are a number of reasons why the published data on contractual face values,
44
Publicly available data Contractual face values
1980 1990
2000
1980 1990
2000
Official Lending
88 163
116
97 192
134
(i) Bilateral Loans
60
97
61
66 113
71
(ii) Multilateral Loans 28
66
55
31
79
63
Private Lending
84 114
82
89 103
86
(i) Commercial Banks 75
77
22
79
66
26
(ii) Bonds
09
37
60
10
37
60
Table 9: Comparison Between Reported and Constructed Contractual Face Values, by Debt
Instrument (as % of GNI)
Publicly available data Contractual face values
1980 1990
2000
1980 1990
2000
Latin America and Caribbean 185 310
200
199 285
216
East Asia and Pacific
180 224
153
179 239
155
Europe and Central Asia
227 388
243
226 366
257
South Asia
134 266
223
146 301
224
North Africa and Middle East 477 645
374
478 612
381
Sub-Saharan Africa
275 869
808
269 819
902
Table 10: Comparison Between Reported and Constructed Contractual Face Values, by Region (as % of GNI)
45
which are based on direct reports of contractual face values by the countries, might differ
from our construction of face values by summing principal flows. The first is that some of
the countries themselves may have inadvertently reported contractual face values that differ
from the sum of future principal repayments specified in their loan agreements. The second
concerns the way debt with tranches issued in different currencies are reported. In such cases,
the World Bank’s Debtor Reporting System Manual gives countries the option to combine
the amounts from different tranches “at the exchange rates prevailing on the date of the
commitment” (World Bank 2000, 12). As future principal repayments are specified using
current and forecast future exchange rates, they can be expected to differ from the amounts
calculated using the exchange rates at the time of issue.
9
Appendix C: Results From Unbalanced Sample
As explained in Appendix A, the data we obtained from the World Bank has a total
of 138 countries, but we only used a subset of 100 countries in our calculations. The main
reason for this difference is our desire to have a balanced sample of countries and avoid noise
in our results that is caused by changes in the composition of the sample. There are two
reasons for the exclusion of 38 countries (listed in Table 11): (1) For 17 countries, the debt
data we obtained from the World Bank covers the entire sample period (1979—2006), but we
were not able to find reliable estimates of GNI over the whole sample period; (2) for the
remaining 21 countries, the data on debt did not cover the entire sample period. This last
group of countries is mostly composed of former Soviet Union countries and other Eastern
European countries, although there are some exceptions.
The two sets of countries that were excluded are not randomly chosen, and therefore,
it is expected that certain results can be different for the two sets of excluded countries in
comparison with the set of countries included in the analysis. To give an idea of how different
these two sets of countries are from the set of countries included, we plot the ratios of our
proposed measures of debt stocks (ZCE face values and present values) to the contractual
face value for their debts over time.
From Figures 8 and 9, we can see that there are some differences between the three sets
of countries. In particular, countries that were excluded because of missing data tend to have
46
Country
# Years
Country
# Years
Afghanistan
28
Lithuania
17
Albania
18
Macedonia
28
Angola
28
Moldova
16
Armenia
16
Mongolia
22
Azerbaijan
14
Montenegro
7
Belarus
15
Myanmar
28
Bhutan
27
Romania
28
Bosnia-Herzegovina
28
Russian Federation
28
Cambodia
28
Serbia
28
Croatia
20
Slovak Republic
28
Eritrea
14
Somalia
28
Estonia
15
South Africa
17
Georgia
15
Tajikistan
15
Iran
28
Turkmenistan
15
Kazakhstan
15
Ukraine
15
Kyrgyz Republic
15
Uzbekistan
15
Laos
28
Vietnam
28
Latvia
16
Yemen
28
Lebanon
28
Zimbabwe
28
Table 11: List of Countries in our Data Set that were Excluded from the Analysis
1.8
1.7
1.6
Analyzed sample
1.5
1.4
Excluded sample 1:
GNI
1.3
1.2
Excluded sample 2:
Incomplete debt data
1.1
1.0
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 8: Ratio of ZCE face value to contractual face value: Included vs. excluded countries
47
1.0
Analyzed sample
0.8
0.6
Excluded sample 1:
GNI
0.4
Excluded sample 2:
Incomplete debt data
0.2
0.0
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 9: Ratio of 10CE face values to contractual face values: Included vs. excluded countries
a substantially smaller difference between debt stocks based on ZCE face values and those
based on contractual face values; and for some of the countries for which we do not have debt
data, the ratio of 10CE face values to contractual face values is substantially lower than in
the sample we used. This is in part due to the fact that Eastern European and former Soviet
Union countries were able to obtain loans at relatively low interest rates. In proportion to
the whole debt stock (all 138 countries), the debt stock of the countries that were excluded
due to missing data never accounts for more than 4% of the entire debt stock. Regarding
the set of countries that were excluded on account of missing GNI data, there are periods
where there are no significant differences relative to the sample of countries that was used for
analysis. But there is one period, specifically between 1989 and 1996, where the differences
between ZCE face values and contractual face values are relatively large. The reasons for
these differences are not clear to us. Despite these differences, our main conclusions in the
paper are not affected by the sample that we use, and they simply reflect that there is some
heterogeneity with respect to some of the issues we raise.
48
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