The Benefits of GDP-Linked Securities

Abstract

The book enumerates six attractions of issuing GDP-linked securities rather than plain vanilla loans on the part of sovereign issuers: part of the risk is shifted to lenders; a reduction in the danger of default; certain growth-linked securities have valuable anti-cyclical fiscal properties; it expands fiscal space; GDP-linked securities have a particular attraction for countries that have entered a monetary union; finally, it may ease the task of restructuring. As far as lenders are concerned, one of the potential benefits—a reduced danger of default—is identical to that discussed for borrowers. In addition to this, the advantages are their provision of an instrument which allows investors to express a view on national growth rates, greater compliance with sharia and the provision of an instrument which can combine all three of the attributes that ultimate lenders seek: inflation protection, a reasonable measure of stability, and of growth in value. A quantitative exercise shows the value of diversification in reducing the probability of loss.

Annex

The data underlying the analysis of diversification in this chapter came from what was the most recent database of World Economic Outlook at the time the calculations were performed, in the Spring of 2016, which was the October 2015 database. They consisted of the percentage growth rate of GDP in constant prices from 1981 to 2010 inclusive. These data are presented in Table 4.2.

Table 4.2 Data for calculation of riskiness of a mixed portfolio

The data in Table 4.1 were obtained from the above by rounding to one decimal place, taking the last ten years, and subtracting from each column the calculated average of the previous 20.