Global financial community calling for redefining sovereign risk: IMF

The traditional definition of sovereign risk needs to be broadened in order to better understand and address the current financial challenges, concluded an International Monetary Fund (IMF) high-level conference in Washington on Friday.


Sovereign risk, broadly, the probability that a country may not pay its debts, "has been shown to be too narrow by the global financial crisis," according to a statement released by the IMF.


"Developments since mid-2008 have exposed very complex interactions between fiscal balances, public and private debt, and the financial sector."


The IMF conference, Financial Crises and Sovereign Risk-- Implications for Financial Stability, brought together policymakers and regulators from developing and emerging countries, academics, representatives from global banks, and senior Fund staff, at IMF headquarters. They exchanged their ideas of new, multifaceted and more nuanced dynamic of sovereign risk and its implications for financial stability.


"Sovereign risks have been transformed in a number of important ways as a direct consequence of the crisis and major fault lines in the financial sector. As the public sector intervened to support financial institutions, distinctions between sovereign and non-sovereign and private liabilities have been blurred, and public exposure to private risks has increased," IMF Managing Director Dominique Strauss-Kahn said in his opening remarks.


The IMF noted that the global crisis has seen unprecedented government support to the real economy and the financial sector. The combined effects of these interventions and the loss in revenues caused by economic slowdown have resulted in worsening fiscal balances, increased public debt, and a general deterioration in countries' public finances. Substantial and sustained efforts to restore soundness to public balance sheets are necessary.


The size, maturity structure, composition, and ownership of public debt have been altered. Investors' risk aversion has grown and concerns of contagion among the sovereign, quasi-sovereign, and financial sectors remain at elevated levels.


The Fund said that in this highly uncertain context, the conventional measurements have become too limited and unable to explain the present elevated levels of sovereign risk in some countries, creating an urgent need for proper identification, measurement, and management.


"A wider definition of sovereign risk is warranted, one where core fiscal variables and the macroeconomic context are complemented with elements reflecting broader balance sheet developments, debt portfolio structure, investor base, cross- border linkages, and financial assets of a country," Strauss-Kahn added.
(Source:http://news.xinhuanet.com)