Name any emerging or developing country and chances are that it is, has at some point been, or will soon be under debt “distress”—read, unable to pay back what it owes. The reasons vary—from excessive public spending to corporate corruption, and from suddenly retreating lenders to suddenly falling commodity prices. But one thing is certain: the human and material cost of debt crises are enormous. Helping governments borrow responsibly ought to be a priority for donors and multilaterals. It rarely is.
That is the context in which the first, A-to-Z handbook on public debt management was published in 2023. Formally called “Sustainable Financing of Development and Infrastructure – A Handbook for Borrowers and Lenders,” this edited volume brought together the world’s leading experts in the field, covered every step of the sovereign borrowing process and, best of all, it is freely available online. It was commissioned by the Multilateral Cooperation Center for Development Finance and its implementing partner, the Asian Infrastructure Investment Bank. And it inspired a graduate course on public debt management—another first—offered at Georgetown University.
What does the Handbook say? It starts by exploring, in a language that anyone can understand, the methodologies to calculate how much debt is too much debt. Many of those methodologies—created, updated, and guarded by the IMF and the World Bank—have come under tough scrutiny, not least because they are used to decide how much relief is necessary for a government’s debt to be sustainable. The implication is how much money will be left for public schools, vaccination campaigns, or food programs—no wonder debt sustainability analyses are contentious.
Once you know how much you can sensibly borrow, the next decision is how to borrow. For that, you build a “medium-term debt strategy.” That is where you choose whether to borrow at short or long maturities, in local or foreign currency, and at floating or fixed interest rates. Each choice has its costs and its risks—for example, foreign currency borrowing tends to have lower interest rates, but you are exposed to changes in the exchange rate. You may also choose to develop your domestic capital market through your borrowing; it can become a reliable, long-term source of financing.
Having decided how much and how to borrow, you next decision is when to borrow. The so-called “annual borrowing plan” is much more than a calendar. The very announcement of the plan tells the world that you are confident that there will be someone ready to finance you—at a reasonable price. That is credible only if you know and nurture your “investor base”, the moniker for the financiers that are or may be interested in financing you. Some of them may be one-time lenders. But most will be repeaters—including the “primary dealers” whom you give regulatory benefits in exchange for brokering or buying your bonds. Before you approach any of them, you will have to calculate how much cash you will need exactly when—carrying too much cash can be a problem—and which type of creditor you will tap—you want to max out the most concessional lenders first, if you have any.
How about if the preferences of your investor base change? You must cater for that. Arguably, the largest change in preferences in recent times has been the rising demand for “thematic bonds”—green, blue, social, gender, SDGs, etc. These bonds carry a promise to spend the proceeds on the environment, the oceans, the poor, women, and so on. The promise is not legally binding—except for “sustainability-linked” bonds—and, in general, the bonds are not cheaper for the issuer. But they do send out a powerful strategic signal of what matters to the government. (NB: thematic bonds, and more specifically green bonds, were invented by the World Bank’s Treasury, back in 2008; it sold them to Sweden’s Pension Fund).
As you borrow, over time you accumulate a “debt portfolio” of dozens, even hundreds, of loans and bonds. The portfolio does not just sit idle; it calls for constant optimization. As circumstances change or you expect them to change—say, the trend in global interest rates turns upwards—you want to explore opportunities to reduce your cost—say, by repaying floating-interest loans before they become too expensive. This is known as “liability management” and it involves interest-, currency-, and debt-swaps. There is a price tag for it, but it is worth paying it. (NB 2: guess who invented interest-rate swaps? You guessed, the World Bank’s Treasury did, in 1981, in a contract with IBM.)
By now, you may think that public debt management is pretty tight: with sound debt sustainability analysis, medium-term strategies, borrowing plans, and liability management, things pan out fine. Well, they usually do not. Shocks happen. Fiscal budgets get derailed by natural disasters or commodity price volatility all the time. It can be costly to recover and reconstruct after a hurricane or an earthquake. And a spike in oil or gas prices can bloat your public expenditures if you are an oil importer and subsidize fuel—as many countries do. Credit rating agencies know that you face those risks, so they rate you down and your debt is more expensive. The good news is that you can “hedge” against most fiscal risks. CAT bonds and commodity options and futures are the main instruments for that.
Other risks are more difficult to hedge. A government might become liable for debts if certain events take place. These “contingent liabilities” can be explicitly written in a contract, such as a loan guarantee or a guarantee of minimum revenue for a private infrastructure provider. They can also be unwritten but expected—and priced in—by the market. Would any government let a state-owned power company go bust if it meant widespread blackouts? Let a bank default on its depositors and trigger a run that takes down the entire financial system? Or let a hardscrabble province go without teachers, nurses, or police so it can honor its loans? Creditors and credit rating agencies know the answer to those questions—the government will sooner or later bail those debtors out. That is why, if you cannot avoid contingent liabilities altogether, you at least need to identify, quantify, report, and monitor them. Most important, decide early who and how will pay if the contingencies materialize.
Finally, there is the who-will-do-all-this question. Setting up an institution—a “debt management office”—with the mandate and the capacity to borrow on behalf of a government is not trivial. The laws have to be explicit as to who is allowed to do what. A network of communication and coordination with other agencies of the State has to be built, without compromising technical independence. Staff with market-valuable skills have to be recruited—and retained. And transparency and accountability have to prevail, not just because they make debt cheaper but because public borrowing commits generations of citizens to pay it back.
What is the take-home message? Public debt management is like flying a jumbo jet: a process of many steps, each complex in itself, each calling for specialized expertise, and each carrying a potentially catastrophic cost of failure. You wonder how a Handbook on it had not been published long ago.
*Marcelo Giugale, a former director at the World Bank, is currently an Adjunct Professor at Georgetown University and an adviser to governments and multilaterals.
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KEYWORDS bonds, fiscal risk, government, public debt, sustainability
