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Prudent Debt Management
(Backgrounder)

Finance Ministers and Central Bank Governors Meeting
Berlin, Germany, December 15 & 16, 1999

Why is Prudent Debt Management Important?

The size and composition of a country’s external debt plays a key role in determining its vulnerability to international financial crises. Excessive external debt can make a country susceptible to a sudden loss of financial market confidence. But even where a country’s overall level of debt is acceptable, the country may nonetheless be vulnerable to financial turbulence if the maturity structure of the debt, or "bunching" of debt repayments, leads to a concentration of payment obligations in a relatively short period.

This has led to a renewed interest by the international community in looking for ways of helping countries improve their debt management. The aim is to ensure that they are properly insulated from adverse external shocks that could otherwise trigger a financial crisis.

What is Being Done?

In reducing the vulnerability of countries to financial crises, one of the most important steps governments can take in the management of their own sovereign debt is to avoid an excessive buildup of short-term debt relative to their foreign exchange reserves.

This can be done through:

Unsound debt management in the private sector can also leave a country vulnerable to financial turbulence.

Steps to address excessive risk-taking by the private sector include:

A Role for the G20

At their meeting in Berlin, ministers and governors of the G20 will consider how countries can use prudent external debt management to reduce their vulnerability to financial crises.

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Source: Department of Finance, Canada


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