Emerging-Market Banks’ Government Debt Holdings Pose Financial Stability Risks by Andrea Deghi, Fabio Natalucci and Mahvash S. Qureshi published by IMF (4/2022).
“Banks’ holdings of sovereign debt rise to a record as governments spend to cushion pandemic impact.
The pandemic has left emerging-market banks holding record levels of government debt, increasing the odds that pressures on public-sector finances could threaten financial stability. Authorities should act quickly to minimize that risk.
Governments around the world have spent aggressively to help households and employers weather the economic impact of the pandemic. Public debt has mounted as governments have issued bonds to cover their budget deficits. The average ratio of public debt to gross domestic product—a key measure of a country’s fiscal health—rose to a record 67 percent last year in emerging market countries, according to Chapter 2 of the IMF’s April 2022 Global Financial Stability Report.
Emerging-market banks have provided most of that credit, driving holdings of government debt as a percentage of their assets to a record 17 percent in 2021. In some economies, government debt amounts to a quarter of bank assets. The result: emerging-market governments rely heavily on their banks for credit, and these banks rely heavily on government bonds as an investment that they can use as collateral for securing funding from the central bank…”
