Pension Privatization and Country Risk

22 Pages Posted: 26 Jan 2012

See all articles by Alfredo Cuevas

Alfredo Cuevas

International Monetary Fund (IMF)

Maria de los Angeles Gonzalez

International Monetary Fund (IMF)

Davide Lombardo

European University Institute

Arnoldo López-Marmolejo

Bank of Mexico

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2009

Abstract

This paper explores how privatizing a pension system can affect sovereign credit risk. For this purpose, it analyzes the importance that rating agencies give to implicit pension debt (IPD) in their assessments of sovereign creditworthiness. We find that rating agencies generally do not seem to give much weight to IPD, focusing instead on explicit public debt. However, by channeling pension contributions away from the government and creating a deficit of resources to cover the current pension liabilities during the reform’s transition period, a pension privatization reform may transform IPD into explicit public debt, adversely affecting a sovereign’s perceived creditworthiness, thus increasing its risk premium. In this light, accompanying pension reform with efforts to offset its transition costs through fiscal adjustment would help preserve a country’s credit rating.

Keywords: Credit Risk, Credit Ratings, Pension Reform, Public Debt, Transition Costs

JEL Classification: H55, F34

Suggested Citation

Cuevas, Alfredo and Gonzalez, Maria de los Angeles and Lombardo, Davide and López-Marmolejo, Arnoldo, Pension Privatization and Country Risk (March 26, 2009). Available at SSRN: https://ssrn.com/abstract=1992445 or http://dx.doi.org/10.2139/ssrn.1992445

Alfredo Cuevas (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Maria de los Angeles Gonzalez

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Davide Lombardo

European University Institute ( email )

Badia Fiesolana
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Italy

Arnoldo López-Marmolejo

Bank of Mexico ( email )

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Mexico City, 06059
Mexico