it’s one line on page 138, book 4.
“sovereign debt also typically lacks an enforceable seniority structure, in contrast to private debt”.
yes, private debt OK. But why is this sentence in the EMD section? I would say EMD is more structured than developed debt? Is it not the case that local banks, IMF, Paris club, would hold seniority in EMD. But if the Fed defaulted the process would be arbitary?
I don’t understand why this line is included?
Not sure, but this seems like it is in the weeds ( not knocking your efforts to understand the material ).
When looking at this sentence, my impression is that the author is trying to convey the Sovereign Debt risk depends upon the Emerging Market issuing the Sovereign Debt. My understanding of Sovereign Debt is that it is considered risk free, but there have been defaults. Based on this sentence, I believe that the author is saying that there is no priority structure in the issuance of those “risk free” sovereign debt bonds, unlike private debt.
This is most definitely in the weeds. which is why any weed enthusiast should make a point of looking closer. Have a quick scan at this paper from 2004 https://www.imf.org/external/np/res/docs/2004/070204.pdf It is safe to bet that the above is the inspiration for the sentence you cite (which in turns is from a book published in 3 years later https://books.google.co.uk/books?id=Yr0aZdSQA2kC&pg=PA401&lpg=PA401&dq=sovereign+debt+also+typically+lacks+an+enforceable+seniority+structure,+in+contrast+to+private+debt&source=bl&ots=Xt0uyzjcsB&sig=gZ415SdRVaus9X0UUpAvXoMyDA8&hl=en&sa=X&ved=0CDQQ6AEwA2oVChMI_u6qgaOayAIVjrgeCh1fUQP1#v=onepage&q=sovereign%20debt%20also%20typically%20lacks%20an%20enforceable%20seniority%20structure%2C%20in%20contrast%20to%20private%20debt&f=false) In the said paper it is said that explicit seniority is absent in EM Sovereign debt whereas it exists “at the corporate level […] either by statute or through bond covenants”. In short, the paper argues that explicit seniority would be a positive development in EM Sovereigns especially to mitigate the issue of “debt dilution" (Section I. subsection C. page 7). As to the idea of ‘enforceability’ it is worth having a read through Box 4. @ page 43 (still in the 2004 paper) which, albeit a tad technical, gives a good foundation.
Take it from a fellow re-taker, you got this wrong. EM Sovereigns are a lot of things but risk-free isn’t one. The CEMBI IG spread is ~300bps over treasury and quite a lot of this premium is compensation for default risk.
Thanks Band 6
yup, I thought the sentence was a bit wierd on it’s own. And it kind of jigsaws with this line at the start of the chapter…
“In such cases, the portfolio manager may consider investing in nonsovereign bonds not included in the index to enhance portfolio returns”
i.e. if you’re given a question like…
~give reasons to invest a sovereign EM tracker in nonsovereign~ then there are two motivations .
n.b.
I googled “world bank debt seniority” and this is the first link,
http://www.voxeu.org/article/sovereign-debt-repayments-evidence-seniority
It confirms that there is a “assumed” seniority, just like I had in my mind. but it’s also pretty clear this is not set in stone, so cfai will enjoy to catch you out here.