Each year, the OECD circulates a survey on the borrowing needs of member countries. The responses are incorporated in the OECD Sovereign Borrowing Outlook to provide regular updates of trends and developments associated with sovereign borrowing requirements and debt levels from the perspective of public debt managers. The Outlook makes a policy distinction between funding strategy and borrowing requirements. The central government marketable gross borrowing needs, or requirements, are calculated on the basis of budget deficits and redemptions. The funding strategy entails decisions on how borrowing needs are going to be financed using different instruments (e.g. longterm, short-term, nominal, indexed, etc.) and distribution channels.

This inaugural edition of the OECD Sovereign Borrowing Outlook 2012 is published against a challenging global economic backdrop. Despite some encouraging signs in sovereign debt markets and other indicators, the outlook remains highly uncertain. Failure to prevent further contagion from the euro area sovereign debt crisis, renewed pressures in the banking sector, and a growth slowdown in non-OECD economies all present risks for the global economic recovery in the near term.

OECD governments are facing unprecedented challenges in the markets for government securities as a result of continued strong borrowing amid a highly uncertain environment with growing concerns about the pace of recovery, surging borrowing costs, sovereign risk and contagion pressures.

OECD debt managers are facing unprecedented funding challenges. This chapter provides estimates for 2011 and 2012 of (a) government borrowing needs and (b) central government debt. Raising large volumes of funds at lowest cost, with acceptable roll-over risk, remains a great challenge, with most OECD debt managers continuing to rebalance the profile of debt portfolios by issuing more long-term instruments and moderating bill issuance. Governments’ preferences to enhance fiscal resilience encourage the maintenance of a diversity of nominal and price-indexed instruments along the maturity spectrum.

This chapter deals with the complications for issuers generated by the pressures of perceptions of an increase in sovereign risk, in particular whereby “the market” suddenly perceives the debt of some sovereigns as “risky”. A lack of consensus on what exactly constitutes sovereign risk is an important complication to properly measure and price this risk. Since the track-record of “sovereign risk pricing” is not very impressive, suggested market measures of this risk should be treated with great caution. One should, therefore, be very cautious in concluding that the sovereign debt of an OECD country has indeed lost its “risk-free” status. The chapter also argues that (a) the liquidity effects of downgrades by credit rating agencies (CRAs) contribute to very spiky market dynamics and that (b) additional study of the spillover effects of rating changes to other sovereigns is warranted. This chapter deals with the complications for issuers generated by the pressures of perceptions of an increase in sovereign risk, in particular whereby “the market” suddenly perceives the debt of some sovereigns as “risky”. A lack of consensus on what exactly constitutes sovereign risk is an important complication to properly measure and price this risk. Since the track-record of “sovereign risk pricing” is not very impressive, suggested market measures of this risk should be treated with great caution. One should, therefore, be very cautious in concluding that the sovereign debt of an OECD country has indeed lost its “risk-free” status. The chapter also argues that (a) the liquidity effects of downgrades by credit rating agencies (CRAs) contribute to very spiky market dynamics and that (b) additional study of the spillover effects of rating changes to other sovereigns is warranted.

Issuers had to deal with euro area-induced contagion effects. This chapter notes that, although direct effects are easier to quantify, indirect channels could prove to be more damaging. Indirect channels of contagion include a re-pricing of both sovereign risk and counter-party risk among financial intermediaries. This, in turn, may lead to higher funding costs and roll-over risk for sovereigns and financial institutions, impaired ability to pledge sovereign securities as collateral and flight-to-safety by investors. The chapter also argues that monetary union sovereigns are in particular vulnerable for liquidity crises leading to situations where they cannot (easily) obtain funds to roll over their debt at ‘reasonable’ interest rates.

Issuance conditions have become tougher with sometimes weak demand at auctions (lower cover ratios) and greater auction tails reflecting relatively unsuccessful auction results. This chapter explains that many debt management offices had at times to adjust their issuance procedures and techniques so as to cope with unprecedented volatility, increased competition in raising funds and (potential) market absorption problems. The chapter also provides an overview of changes made in issuance procedures and the introduction of new distribution channels. It also concludes that maintaining a diversified investor base has become more important than before.