=Paper=
{{Paper
|id=None
|storemode=property
|title=Are Securities Secure: Study of the Influence of the International
Debt Securities on the Economic Growth
|pdfUrl=https://ceur-ws.org/Vol-1000/ICTERI-2013-p-360-365-ITER.pdf
|volume=Vol-1000
|dblpUrl=https://dblp.org/rec/conf/icteri/BondaM13
}}
==Are Securities Secure: Study of the Influence of the International
Debt Securities on the Economic Growth==
https://ceur-ws.org/Vol-1000/ICTERI-2013-p-360-365-ITER.pdf
Are Securities Secure: Study of the Influence of the
International Debt Securities on the Economic Growth
Darya Bonda1 and Sergey Mazol2
1
Belarus State Economic University, Minsk, Belarus
bondadasha@gmail.com
2
Academy of Public Administration, Minsk, Belarus
mazols@yandex.ru
Abstract. The paper studies the interdependence of the amount of international
debt securities, amounts outstanding by country (borrowers) and the GDP
growth by country. The author have chosen 34 countries, that represent every
region included in the BIS classification, that is developed countries, offshore
centers, developing Europe, Latin America, Asia and the Pacific and Africa. It
was found that the excessive amount of such type of securities in comparison
with GDP leads to slowdown in the economic growth next year.
Keywords. International debt securities, Economic growth, Financial crisis
Key terms. Development, MathematicalModel
1 Introduction
The last financial turmoil has revealed the drawbacks of the existing global financial
system. Surprisingly, the worst crisis since the Great Depression has offered a range
of opportunities to the world society: to examine the system, exclude “toxic” elements
and introduce new methodology to financial regulation.
During the last decades new avenues for financing were creating, deepening the fi-
nancial system aside from widening the choice of monetary instruments [1] that have
caused overestimation of assets and, consequently, financial collapse.
Despite this issue is under thorough control of Bank of International Settlements,
Securities and Exchange Committee, International Derivative and Swap Association,
Securities Industry and Financial Market Association, every scientists, analyst, gover-
nor, outstanding person and a regular student has its own interpretation of how the
crisis works, its causes and consequences.
Are securities secure … 361
One of the reasons for the growing financial instability was the excessive amount of
various types of securities both in national economies and international arena as well
as the complexity of the securities issued. New types of financial instruments usually
at first are accepted as great invention of humanity, then, especially during recessions
are usually blamed for crisis for speculation reasons [7]. After the recovery, they are
still widely spread all over the world. Futures, options and other derivatives have
experienced such an attitude [4]. International debt securities are considered to be a
financial instrument. The amount of securities outstanding in 2007, i.e. country’s
liabilities, could prevent countries from sustainable growth in 2008.
To the author’s point of view, it is reasonable to study the interdependence of the
amount of International debt securities, amounts outstanding by country (borrowers)
and the GDP growth by country. The presence of such interdependence can allow us
to criticize this type of securities and advise the countries to minimize their usage for
the sake of sustainable economic growth.
2 Results
The authors are analyzing the interdependence of the amount of international debt
securities outstanding in 2007, and the economic growth, expressed in GDP index in
the research.
Debt security is a negotiable financial instrument serving as evidence of debt [5].
The statistics on international debt securities issues cover long-term bonds, notes,
short-term money instruments [2]. Debt securities include government bonds, corpo-
rate bonds, CDs, municipal bonds, preferred stock and collateralized securities (such
as CDOs, CMOs, GNMAs). Debt securities may be protected by collateral or may be
unsecured, which underlines the importance of scrutinizing them as one of the key
instruments of securitization. Collateralized debt obligations are considered to be a
risky instrument as far as their coupons and principal repayments are dependent on a
diversified pool of loan and bond instruments, either purchased in the secondary mar-
ket or from the balance sheet of an original asset owner (Handbook of Securities Sta-
tistics). Consequently, through assessing the value of underlying assets, collateralized
debt obligation as well as other asset-backed securities spread risk while diversifying
it, meanwhile creating a range of credit derivatives. These instruments are widely
used to make the debt more liquid and make the money lent work as if they were not
borrowed and, furthermore, get a margin. Therefore, the author finds it crucial to pay
significant attention to this kind of financial instrument as a mean of spreading risk of
insolvency of an entity within the international scale.
The BIS definition of international securities (as opposed to domestic) is based on
three major characteristics of the securities: the location of the transaction, the cur-
rency of issuance and the residence of the issuer. International issues comprise all
foreign currency issues by residents and non-resident in a given country and all do-
mestic currency issues launched in the domestic market by non-residents [2].
GDP in current price, purchasing power parity, is the second element of the re-
search. It was chosen as an indicator of the national output, combining real and finan-
362 D. Bonda and S. Mazol
cial sector, thus reflecting the size of the economy. The amount of international debt
securities can be compared to the GDP, as both indicators reveal the capacity of the
countries’ economies.
In the figure 1 one can see historical correlation between the international debt se-
curities and GDP in current prices (data from [1], [2], [3], [8]), which shows that the
interdependence between 2 components really exists, in addition, during 2002-2008
the line shows different slope. In 2004 and 2005 the inclination is lower, which means
the slowdown in GDP growth rate and IDS amounts and, on the contrary, in 2007 and
2008 the graph indicates the rise of the world economies.
Historical Correlation between IDS and GDP, world, 2002-2008
70000
60000
50000
GDP, bln UDS
40000
30000
20000
10000
0
0 5000 10000 15000 20000 25000 30000
IDS, bln USD
Fig. 1. Historical correlation between IDS and GDP, world 2002-2008
As mentioned in the title, the graph shows the world’s tendency. The last economic
crisis has damaged major economies leaving some small and developing economies
untouched, despite of its scale. This means that by-country analysis is necessary to
provide the real evidence of such correlation.
The authors have chosen 34 countries that represent every region included in the
BIS classification that is developed countries, offshore centers, developing Europe,
Latin America, Asia and the Pacific and Africa. Although the most variation in the
amount of securities outstanding had been noticed while scrutinizing the data from
developed countries the data utilized represents each continent. Africa is represented
by Egypt, Lebanon, Saudi Arabia and UAE, Asia and the Pacific – the Philippines,
Singapore, Japan and China, Developing Latin America – Argentina, Brazil, Colom-
bia, Costa Rica, Developing Europe – Belarus, Bulgaria, Czech Republic, Estonia,
Russia, Ukraine, offshore centers – by the Bahamas, Developed economies – by Aus-
tralia, Austria, Belgium, Canada, Finland, France, Germany, Greece, Iceland, Italy,
Norway, Spain, Sweden, the UK and US. The X, independent variable, is the amount
of international debt securities by country outstanding in 2007 divided by the nominal
GDP in billion of USD in 2007, whereas the dependent variable is GDP growth rate
in 2008 in comparison with 2007. The linear regression is shown on figure 2.
Are securities secure … 363
Correlation between IDS/GDP 2007 and GDP growth rate
2008/2007
y = -10,071x + 20,058
R2 = 0,5193
35
GDP growth rate 2008/2007
30
25
20
15
10
5
0
-50,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50
-10
-15
IDS/GDP coefficient
Fig. 2. Correlation between IDS/GDP 2007 and GDP growth rate 2008/2009
The model is described by formula 1:
GDP= 20,058-10,071*COEF (1)
where GDP – nominal growth rate in 2008 compared to 2007;
COEF – IDS/GDP coefficient as a ratio of IDS amounts outstanding 2007 and GDP
(in current prices, power of purchasing parity, 2007)
The slope is negative, which means the opposite correlation between variables, the
bigger the coefficient in 2007, the lower the GDP growth rate in 2008, which makes
sense and confirms the author’s theory. The correlation coefficient, which shows the
fraction of relationship between variables is -0,72 or 72% of opposite relationship.
Therefore, the relation is considered to be strong. The determination coefficient is
0,52 or 52%, which means the variation of the dependent variable is explained by
52% by the independent one.
The linear regression has been chosen because the goal of the author was to find the
existence of the relationship between variables, and in addition, negative one, how-
ever, admitting the complexity of the relationship, not exactly finding the most appro-
priate one.
Among the obstacles which prevent linear model from being “best fit” are, first of
all, the different level of financial market development and, thus, the vital need for
specific financial instruments usage. For example, Belarus is not yet ready for devel-
oping credit derivatives, besides, the amount of the securities outstanding has been the
same for a couple of years, that means that the amount of securities is not the princi-
pal reason for economic crisis. Another reason is overstated prices in some countries
which result in the high inflation level, which increases the GDP index far too high to
depict the precise relationship between variables. Examples can be Ukraine, Russia
and Argentina. As far as offshore centers are concerned, their GDP doesn’t always
364 D. Bonda and S. Mazol
illustrate the real production but the value of financial operations, so they need indi-
vidual approach. However, there are some deviations in the model: for example, Ice-
land – at the lowest point, because of negative GDP growth, or the US and The UK
with the lowest GDP growth in 2008/2007 and highest amount of securities within
examined countries.
In the real economic world one can hardly obtain “pareto efficient” outcomes, thus
no sector of the economy can be better off without making another worse off [6].
Therefore, the increase of the international debt securities, i.e. rise in liquid liabilities,
results in lowering the GDP growth rates. Even though the GDP measures only mar-
ket production and cannot totally used as a measure of country’s well-being [6], a
better measurement of economic activity hasn’t been offered yet. Thus, the influence
of financial sector on the overall economy proves the existence of “systemic external-
ity” [6] of the financial market.
Ranging Countries
35 3,50
30 3,00
IDS/GDP COEFFICIENT 2007
Nominal GDP growth rate
25 2,50
20 2,00
15 1,50
10 1,00
5 0,50
0 0,00
Brazil
Sweden
Czech
US
UAE
Iceland
Ukraine
Lebanon
Canada
Japan
France
Finland
Austria
Spain
Singapore
Greece
Australia
Colombia
Estonia
Costa rica
China
Saudi Arabia
Bulgaria
Argentina
Ukraine
Russia
Belgium
Bahamas
Norway
Belarus
Philippines
Germany
Italy
Egypt
-5 -0,50
Fig. 3. Ranging countries
The figure 3 is built with the purpose to prove the main idea of the research: the
bigger the volume of IDS outstanding (here IDS/GDP coefficient to make it adjust-
able to different economy sizes), the lower the GDP growth rate. Though, the graph
doesn’t totally reflect the inverse dependence, it shows the tendency and proves the
idea for the majority of countries: while the slope of the GDP growth rate curve is
positive, the slope IDS/GDP coefficient curve is negative.
Among the factors that prevent the ideal illustration of the theory is the nominal
character of the variables. One of the elements is the security market capitalization
which can not possibly be turned into real one, therefore the usage of nominal GDP
growth rate is reasonable. Another factor is the uniqueness of economic development
of the countries, like the inflation and unemployment level and the unique interde-
pendence of the economic sectors. Consequently, it is necessary for the countries to
develop its own targeting rules, using its own IDS/GDP ratio and work out the model
of the development that will be adequate for a single economy specifications.
Are securities secure … 365
Perhaps, it is quite possible to work out the limit in IDS/GDP ratio which countries
shouldn’t exceed in order not to affect sustainable development, but this work re-
quires, first of all, individual approach and demands profound knowledge on eco-
nomic development of each country.
3 Conclusions
The overall significance of the model is to show the impact of the issuance of interna-
tional debt securities on the economic growth of the countries. Since the slope of the
regression line is negative, the excessive amount of such type of securities in com-
parison with GDP leads to slowdown in the economic growth next year. Due to the
fact that the issuance of securities is partly managed by governments and financial
organizations (in case of the US – Securities and Exchange Committee (SEC), for
example), the issuance of them can and should be regulated. After the first wave of
financial crisis has gone some rating agencies, for example, S&P have offered down-
grading system for some risky instruments, thus protecting the market from distribut-
ing of excessive risk, as well as SEC has been promoting a new bill to the White
House for a while (Reuters). This information shows that global financial society is
already trying to react and eliminate some of the causes of the financial crisis, how-
ever, not yet fruitful.
The global financial crisis has proved the necessity of the permanent monitoring
and control of the financial system, especially with regard to financial architecture
and innovations [6]. The research has revealed that the volume of the international
debt securities should be a subject of the country’s guideline to optimal control and
efficient rules for financial policy. Increase in the IDS/GDP ratio may lead to finan-
cial instability and increased involvement in the global financial market. In addition,
secure financial instrument usage with careful risk control limits allows financial and,
therefore, the whole economic system to reach sustainable development.
References
1. Bank for International Settlements: Financial Market Developments and their Implications
for Monetary Policy. №39. BIS, Basel (2008)
2. Bank for International Settlements: BIS Guide of Securities Statistics. №39. BIS, Basel
(2009)
3. Bank for International Settlements: BIS Quaterly Review, December 2009. BIS, Basel
(2009)
4. Chibrikov, V.: History of the Derivatives. Economic Issues, 3 (2008)
5. International Swaps and Derivatives Association: Handbook on Securities Statistics, ISDA
(2007)
6. Stiglitz J.: Regulation and Failure in New Perspectives on Regulation, In: The Tobin Pro-
ject, pp. 11–24, Cambridge (2009)
7. Suetin A.: About the Reasons for Financial Crisis. Economic Issues, 1 (2009)
8. World Bank Database, www.worldbank.org