BIS Working Papers|No 1099|
08 May 2023
Summary
Focus
Sovereign borrowing can help buffer the economy from macroeconomic shocks. This indebtedness can also make a country vulnerable to financial distress. The sharp increase in government spending and debt issuance with the Covid-19 pandemic has brought more urgency to understanding how a government can borrow. Answering this question requires knowledge of who invests in sovereign debt and how these investors may influence sovereign borrowing costs.
Contribution
We construct an aggregate data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over 20 years. We use this database to identify which types of investor increase their holdings of sovereign debt when the sovereign borrows more (and reduce their holdings when the sovereign borrows less). We then examine how the sovereign debt holdings of these investors respond to the yield on that debt. Lastly, we combine these results to show how the composition of investors affects the sovereign's borrowing costs.
Findings
Private non-bank investors, mainly investment funds, increase their holdings of sovereign debt by more than other investors as the sovereign's total debt expands. They fund nearly 70% of increases in sovereign debt. Further, non-bank investors are the most responsive to changes in sovereign yields. Accordingly, as a sovereign increases its debt, its costs increase faster if non-bank investors are not present.
Abstract
This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over 20 years. Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield. Counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 6.7% increase in costs, but an outsize 9% increase if non-bank investors are absent. We conclude that these sovereigns are vulnerable to losing non-bank investors.
JEL classification: F34, G11, G15, F41
Keywords: sovereign debt, banks and non-banks, advanced economies and emerging markets
FAQs
Asset managers, such as pension funds, typically hold a large amount of government debt. They need relatively safe long-term assets to match their long-term liabilities. Banks also hold large amounts of sovereign debt, especially of governments in the countries where they are based.
Who holds the national debt? ›
There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.
Why is sovereign debt important? ›
Sovereign debt is used by a country's government for a variety of reasons, such as to pay for public infrastructure. When a government has more expenses than the money it has raised in taxes, then it turns to debt to finance those expenses. International Monetary Fund.
Who holds US debt by country? ›
Top Foreign Owners of US National Debt
- Japan. $1,098.2. 14.52%
- China. $769.6. 10.17%
- United Kingdom. $693. 9.16%
- Luxembourg. $345.4. 4.57%
- Cayman Islands. $323.8. 4.28%
Among other countries, Japan and China have continued to be the top owners of US debt during the last two decades. Since the dollar is a strong currency that is accepted globally, holding a substantial amount of US debt can be beneficial.
Who is America in debt to? ›
The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.
How can the United States get out of debt? ›
- Bonds. Using Debt to Pay Debt. ...
- Interest Rates. Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. ...
- Spending Cuts. From 1921 to 1974, the President led the government budgeting process. ...
- Raising Taxes. ...
- Bailout or Default.
Economists use the ratio of debt to a nation's gross domestic product as an indicator of a country's financial sustainability. The national debt in the United States is primarily held by the American public, followed by foreign governments, U.S. banks, and investors. Treasury.gov. “Debt to the Penny.”
What country does the US owe the most money to? ›
Nearly half of all US foreign-owned debt comes from five countries.
| Country/territory | US foreign-owned debt (January 2023) |
|---|
| Japan | $1,104,400,000,000 |
| China | $859,400,000,000 |
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
6 more rowsHigh sovereign debt levels are associated with slower economic growth and rising default risk. Government borrowers able to issue bonds in their own country's currency are less likely to default.
The People's Republic of China (hereafter 'China') remained the largest EMDE sovereign issuer, accounting for 37% of the total gross debt issued, the highest share in over a decade. On aggregate, EMDE sovereigns' net borrowing fell by 25% in 2022 compared to 2021, with significant differences across regions.
How much does China owe America? ›
China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. 1 However, it does not own the most U.S. debt of any foreign country. Nations borrowing from each other may be as old as the concept of money.
Why is the US in so much debt? ›
Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.
Can US pay its debt? ›
Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).
Who is the world's largest sovereign creditor? ›
China is the world's largest official creditor. The flipside of the large-scale lending flows are increasing debt stocks and growing annual debt service obligations in many recipient countries.
Which country has the most sovereign debt? ›
Profiles of Select Countries by National Debt
- Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
- United States. ...
- China. ...
- Russia.
1) Switzerland
Switzerland is a country that, in practically all economic and social metrics, is an example to follow. With a population of almost 9 million people, Switzerland has no natural resources of its own, no access to the sea, and virtually no public debt.
Are U.S. Treasury bonds sovereign debt? ›
U.S. Treasury. Our U.S. Treasury indices are designed to track the performance of U.S. dollar-denominated domestic market sovereign debt issued by the U.S. government.
