Greco-Roman Lessons for Public Debt Management and Debt Market Development
Greece and Italy initiated efforts to improve public debt management and develop their domestic debt markets respectively in the late 1970s and mid-1980s. At that time, both countries suffered from large and rapidly growing public debt, excessive r...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/09/5175068/greco-roman-lessons-public-debt-management-debt-market-development http://hdl.handle.net/10986/14295 |
| Summary: | Greece and Italy initiated efforts to
improve public debt management and develop their domestic
debt markets respectively in the late 1970s and mid-1980s.
At that time, both countries suffered from large and rapidly
growing public debt, excessive reliance on short-term bills
held by commercial banks, a strong preference of households
to save in bank deposits, and a weak presence of
institutional investors (pension funds, insurance companies,
and mutual funds). Continuing large fiscal deficits, high
levels of interest rates and inflation, and serious policy
credibility problems impeded the use of long-term
instruments. The authors provide a detailed analysis of the
characteristics of the instruments that were used in these
two countries, their pace of issuance, and their impact on
the composition of public debt. The authors note that the
main Greco-Roman lesson for developing and transition
countries concerns the transition from an excessive reliance
on short-term Treasury bills, held by captive banks, to a
liquid market with long-term instruments held, and actively
traded, by long-term institutional investors. The transition
required moving gradually to medium-term instruments,
experimenting with innovation, and targeting households and
foreign investors, while taking steps to establish policy
credibility by lowering fiscal deficits and inflation. When
reliance on captive sources of finance was substantially
reduced and policy credibility was established, both
countries focused on developing active money markets and
liquid secondary markets with benchmark issues of fixed-rate
long-term securities. They ultimately succeeded in
developing active professional markets, using modern
practices, targeting well-established European institutional
investors, and integrating into the highly sophisticated
euro markets. However, integration into the euro markets was
the culmination of a prolonged effort of modernization and
adaptation and was greatly facilitated by their strong
political commitment to achieve economic convergence and
join the euro zone. |
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