2012.04.18 - SAFE ASSETS
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2012.04.18 - SAFE ASSETS


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of foreign reserves to reduce reserve holding 
costs pursue higher returns through high allocations 
to equities and alternative investments\u2014for example, 
up to 50 percent in South Korea and 75 percent in 
the Government of Singapore Investment Corpo-
ration (GIC)\u2014and have a fairly limited need for 
liquidity. #e share of sovereign securities in their 
portfolios is, on average, about 19 percent.
Saving funds, which are mandated to share 
cross-generational wealth or manage strategic 
government investment portfolios, allocate high 
portfolio shares to equities and other investment 
instruments\u201440 percent (e.g., Libya Investment 
Authority) and higher (e.g., Singapore\u2019s Temasek). 
#eir sovereign debt allocations are limited to an 
average of 21 percent.
Box 3.1. The Size of Sovereign Wealth Funds and Their Role in Safe Asset Demand
Stabilization Funds
5%
22%
69%
4%
Saving Funds
4% 5%
21%
55%
15%
Cash
Other "xed income
Sovereign "xed income
Equities
Others
Pension Reserve Funds
9%
15%
4%
39%
33%
Reserve Investment Funds
3% 6%
19%
66%
6%
Figure 3.1.1. Asset Allocations at Sovereign Wealth 
Funds, by Type of Fund, End-20101
Source: IMF staff estimates based on annual reports and other information from 
SWFs.
1Or latest available.
Note: Prepared by Abdullah Al-Hassan, Jukka Pihlman, and 
Tao Sun.
1See International Working Group of Sovereign Wealth 
Funds (2008).
2Stabilization funds are those in Azerbaijan, Bahrain, 
Botswana, Chile, Kiribati, Mexico, Oman, Russia, Timor-Leste, 
and Trinidad and Tobago. Pension reserve funds: Australia, Chile, 
Ireland, and New Zealand. Reserve investment corporations: 
China, Korea, and Singapore. Saving funds: Abu Dhabi, Alberta 
(Canada), Alaska (United States), Bahrain, Brunei, Kazakhstan, 
Kuwait, Malaysia, Norway, Qatar, Russia, and Singapore.
3#e only exception is the Pension Reserve Fund in Chile, 
which moved toward a riskier allocation in 2011.
 
ponsibilities. TONE? 
G LO B A L F I N A N C I A L S TA B I L I T Y R E P O RT
18 International Monetary Fund | April 2012
Kingdom, and the United States than in other 
regions, notably emerging markets (Figure 3.3.1).
CDS spreads did not re!ect adequately countries\u2019 
"scal fundamentals before the crisis, even though 
their di#erentiating power improved considerably 
afterward (Figure 3.3.2). As a result, the 2007 PD 
levels adjusted for "scal fundamentals were con-
siderably higher than those derived from actual 
CDS spreads. $e di#erential between the two was 
particularly high for Europe, indicating weaker "scal 
paths in some parts of Europe. 
$e estimated magnitude of capital adequacy bias 
was high for some regions. $e 2007 bias is linked to a 
mixture of zero percent risk weighting and nondi#eren-
tiation of underlying "scal risks in CDS spreads (Figure 
3.3.3). Using internal ratings-based (IRB) risk weights 
Box 3.3 (continued)
0
5
10
15
20
25
2006 07 08 09 10
Euro area
Emerging Europe
Latin AmericaAsia
United States
United KingdomCanada
Figure 3.3.1. Share of Banks' Assets Allocated to 
Government Debt
(In percent, held-to-maturity, average of banks weighted by 
equity)
Sources: Bankscope; and IMF staff estimates.
correlation = \u20130.01
0
100
200
300
400
500
0 0.1 0.2 0.3 0.4 0.5 0 0.2 0.4 0.6 0.8 10.6 0.7
Fiscal Indicators Index (0\u20131, 1 = worst)
So
ve
rei
gn
 CD
S s
pr
ea
ds
 (b
as
is 
po
int
s)
So
ve
rei
gn
 CD
S s
pr
ea
ds
 (b
as
is 
po
int
s)
Precrisis, 2002\u201307
(country-year observations)
correlation =  0.26 *
0
200
400
600
800
1000
1200
Fiscal Indicators Index (0\u20131, 1 = worst)
Crisis and Postcrisis, 2008\u201311
(country-year observations)
Sources: Bloomberg L.P.; IMF (2011c); and IMF staff estimates.
*Significant at 5 percent level. 
Figure 3.3.2. Sovereign CDS Speads and Fiscal Fundamentals\u2014Precrisis, Crisis, and Postcrisis
Figure 3.3.3. Capital Adequacy Ratios\u2014Actual, IRB\u2010Adjusted, and IRB- and Risk\u2010Adjusted, 2007 and 2010
(In percent)
Sources: Bankscope; and IMF staff estimates.
Note: Data for each region are the median for all reporting banks. CAR = capital adequacy ratio; IRB = internal ratings\u2010based.
1Actual = reported CAR; IRB\u2010adjusted = CAR based on IRB risk weights for government security holdings, rather than zero, using observed CDS spreads in 2007 to 
extract estimates of probabilities of default (PDs); IRB- and risk\u2010adjusted = IRB risk weights, using adjusted CDS spreads to extract estimates of PDs (adjusted CDS 
spreads = observed CDS spreads + 459.33 x IMF Fiscal Indicators Index).
2IRB\u2010adjusted = CAR based on the observed sovereign CDS spreads and the associated PDs in 2010.
0
2
4
6
8
10
12
14
16
Euro area Latin
America
AsiaEmerging
Europe
2007 CAR1
Actual IRB\u2010adjusted IRB- and risk\u2010adjusted
0
2
4
6
8
10
12
14
16
2010 CAR2
Euro area Latin
America
AsiaEmerging
Europe
Actual IRB\u2010adjusted
	
   
C H A P T E R 3 S A F E A S S E TS: F I N A N C I A L S YS T E M CO R N E R S TO N E?
 International Monetary Fund | April 2012 27
!e considerable deterioration in the perceived 
safety of sovereign debt raises doubts about the ability 
of sovereigns to act as suppliers of safe assets, a role 
that they are best positioned to serve. !e critical 
importance of advanced economies\u2019 sovereign debt is 
related to two factors: the very large stocks of these 
securities and their ability to readily meet the col-
lateral and regulatory requirements faced by various 
investors. Regarding its formidable size, the aggregate 
general government gross debt of advanced economies 
amounted to over $47 trillion at end-2011, on aver-
age accounting for roughly 69 percent of each coun-
try\u2019s output (Figure 3.12). IMF projections suggest 
that the total outstanding government debt of this 
group of countries will rise to roughly $58 trillion by 
2016, an increase of 38 percent in "ve years.50 Unlike 
securitized instruments or covered bonds produced by 
the private sector, sovereign debt can generate safety 
that is intrinsic rather than synthetically created by 
combining the payo#s of risky instruments.
Both the lack of political will to reshape "scal 
policies at times of rising concern over debt sustain-
ability and an overly rapid reduction of "scal de"cits 
limit governments\u2019 capacity to produce assets with 
50Outstanding government debt is measured in current prices. 
Projections of total outstanding debt are based on the World 
Economic Outlook.
low credit risk. When large primary de"cits\u2014in line 
with those observed in 2010\u2014persist over extended 
periods, it is di$cult to return public sector funda-
mentals to sound levels. !is suggests that unsustain-
able "scal policies that are not reversed in a timely 
manner impair long-term asset safety. Conversely, 
up-front austerity measures could impair the sustain-
ability of a country\u2019s public debt, especially if accom-
panied by rapid private sector deleveraging and a 
contraction in GDP. !us, the pace of improvement 
of "scal fundamentals needs to account for the 
impact on economic growth and take into consider-
ation country-speci"c circumstances.
!e "scal deterioration in advanced economies can 
have considerable consequences. If levels of recent 
credit default swap (CDS) spreads on sovereign debt 
are used as the criterion for excluding certain countries 
as suppliers of safe assets, current and projected supply 
would drop signi"cantly.51 Using spreads above 350 basis 
points at end-2011 as the cuto# would exclude Greece, 
Hungary, Ireland, Italy, Portugal, Slovenia, and Spain, 
and the projected 2012 supply of safe assets would 
51!e exclusion of certain countries\u2019 assets is justi"ed by inves-
tors\u2019 decisions to underweight or to exclude underperforming 
bonds, even where existing benchmarks are retained. See Chapter 
2 for a discussion in the context of the recent removal of Portu-
guese bonds from the Citigroup World Government Bond Index.
AAA
52%Now
AA
24%
Before
crisis
AAA
68%
AA
20%
A
8%
A
12% BBB
8%
CC
4%
Advanced Economies