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How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?

Author(s):
Francis Warnock
Published Date:
July 2006
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I. Introduction

The widening U.S. current account deficit and the associated large positions that foreigners are amassing in U.S. securities have garnered much attention from academics (Clarida, 2006), policymakers (Bernanke, 2005; IMF, 2005), practitioners, and the financial press (Economist 2005a, 2005b). There are many structural reasons for this accumulation of positions in U.S. securities. For portfolio equity investors, there are few countries in the world that protect the rights of outside investors more vigorously (Kho, Stulz, and Warnock, 2006). For fixed income investors, U.S. bond markets offer unparalleled depth and liquidity (Burger and Warnock, 2006). Notwithstanding the benefits, these large positions leave foreigners exposed to fluctuations in U.S. asset prices. In this paper I address this aspect of foreigners’ U.S. positions by answering one narrow but interesting question: How could a rapid decline in U.S. financial market prices impact foreigners across a wide range of countries? Such a decline has been seen as a key risk associated with a “disorderly” unwinding of global imbalances, and it would appear important to see which countries and regions would be most affected.

Foreigners have accumulated large positions in U.S. bonds and equities—roughly $5 trillion by mid-2004—but there is considerable variation across countries. I trace out the composition of exposure to U.S. securities markets and investigate its potential implications by studying the impact on wealth (in dollar terms and as a share of investor-country GDP) of simultaneous negative shocks to U.S. financial markets. The particular scenario I study, which is supposed to capture the potential effect of a generalized negative shock to U.S. financial markets, is an unexpected 10 percent decrease in U.S. bond and equity prices as well as in the value of the U.S. dollar against other currencies.

Taking into account the currency composition of foreigners’ U.S. holdings, I find that for every 10 percent drop in U.S. bond markets and in the exchange value of the dollar, foreigners’ wealth losses would amount to 2.5 percentage points of foreign GDP. If, in addition, U.S. equity markets also declined by 10 percent, foreigners would incur another 1.5 percentage points of GDP in wealth losses. Thus, for every 10 percent decline in the dollar, U.S. equity markets, and U.S. bond markets, foreign wealth losses would amount to 4 percentage points of foreign GDP. Foreigners are also exposed through their positions in dollar-denominated bonds issued by foreign countries; bringing these holdings into the analysis puts the total wealth loss at nearly 5 percentage points of GDP.2

An investigation of the impact across more than 50 countries reveals that over the past decade, exposure to U.S. securities markets has increased (as a share of GDP) for almost every country in the sample. Moreover, while foreign countries, and especially emerging markets, are more exposed to U.S. bonds than to U.S. equities, on average the overall exposure of developed countries and emerging markets relative to GDP is very similar.

Based solely on their reserves positions, I find that emerging market governments could lose wealth equivalent to about 2¾ percentage points of their GDP.

Because no single data source is appropriate for this study, I utilize two datasets. The first, analyzed in Section II, measures foreign holdings of U.S. securities as reported in the June 2004 comprehensive U.S. benchmark liabilities survey (U.S. Department of the Treasury and others, 2005). The U.S. benchmark liabilities data are of extremely high quality, as they are collected at the security-level and thoroughly checked and cross-checked. They also include, at the country level, the holdings of all foreigners, be they foreign official or private investors. However, as described in Griever, Lee, and Warnock (2001), liabilities are subject to a custodial center bias that owes to the use of third-country custodians. If, for example, a German resident holds a U.S. corporate bond through a custodian in Luxembourg, the U.S. survey will attribute the holdings to Luxembourg. This is due to the fact that the U.S. survey can see only the first foreign address, which will not necessarily coincide with the address of the ultimate holder.

The second data source, analyzed in Section III, is the IMF’s December 2004 Coordinated Portfolio Investment Survey (CPIS). The CPIS data do not match the U.S. data in terms of overall quality—very few countries carry out the full-blown benchmark surveys that are necessary to accurately measure cross-border holdings. However, the CPIS compiles results from individual country’s asset surveys, which should, by design, suffer less from the custodial center bias. Unfortunately, only 4 of 63 countries followed best practices in 2001, defined as conducting mandated surveys of both custodians and end users at both the security and, for cross-checking purposes, aggregate levels.3 That said, the CPIS data are an enormously useful resource, particularly as more and more countries should follow best practices over time.

I utilize the CPIS data to compute implied U.S. liabilities (the amount of U.S. securities residents of each country are reported to own).4 These CPIS-based implied liabilities are not directly comparable with the U.S. liabilities data for two reasons: CPIS data report foreign official positions only in aggregate, not at the country level, and not all countries submit data (China and Taiwan Province of China are two important omissions). But in broad terms the CPIS data can be used to supplement the analysis conducted using U.S. benchmark data.

The reader should note that I am not taking a position on whether the scenario I study—an unanticipated 10 percent decline in the dollar and prices of U.S. bonds and equities—is (or is not) likely to occur, or whether it is a realistic assessment of the asset market losses associated with a “disorderly” resolution of global imbalances. Rather, I am asking the question what the first-order ramifications on foreign wealth would be if it were to occur. One can obviously take issue with various aspects of this particular scenario, and software available on the author’s website makes it easy to study the consequences of different assumptions:5

  • For example, it can be argued that a symmetric, broad-based decline in the dollar is highly unlikely, as exchange rates around the world are not uniformly flexible.
  • Similarly, a simultaneous decline in the dollar and U.S. stock and bond markets may appear improbable (Gagnon, 2005). The United States is different from other countries, however. Foreigners have a sizable impact on U.S. bond markets (Warnock and Warnock, 2005), and a scenario in which foreigners exit their large U.S. bond positions could well produce a simultaneous increase in U.S. yields and a decline in the U.S. dollar.
  • In addition, even a 20 percent fall in the value of dollar bonds and equities in foreign currency may be seen as a conservative view of the potential market consequences of a “disorderly” unwinding of global imbalances.
  • Finally, the paper abstracts from any impact this scenario might have on foreign markets.6

II. Exposure to Long-term u.s. Securities

This section uses data from the June 2004 comprehensive benchmark survey of foreign holdings of U.S. securities (U.S. Department of the Treasury and others, 2005) to quantify foreign exposure to U.S. securities and estimate the impact of a sudden fall in U.S. asset values.7 Survey data for 1994 and 2000 are utilized to depict how foreign exposure to the United States has evolved in recent years. Finally, the section incorporates data on foreign bonds denominated in dollars to ascertain foreigners’ dollar exposure through third countries.

A. Foreign Positions in u.s. Securities in 2004

As of June 2004, foreigners held an estimated $5.1 trillion in U.S. long-term securities (bonds of greater than one year in original maturity and equities; Table 1).8 Foreigners are relatively more exposed to U.S. bonds ($3.2 trillion in holdings; 63 percent of total) than equities ($1.9 trillion). Bond holdings are spread out over securities issued by the Treasury ($1.4 trillion), U.S. agencies ($0.6 trillion), and U.S. corporations ($1.2 trillion).

Table 1.Foreign Positions in U.S. Long-Term Securities, June 2004 1/
Foreign Holdings of U.S. Long-term Securities (million U.S. dollars)
Total

Holdings
EquitiesBondsShare of Bonds

(In Percent)
TotalTreasuryAgencyCorporate
Developed countries3,443,5531,416,1562,027,397843,511303,814880,07259
Euro Area1,367,630526,284841,346155,645140,917544,78462
Austria17,68510,2267,4591,4472,5113,50142
Belgium302,67918,089284,59013,97948,959221,65294
Finland7,4864,5052,9818765051,60040
France102,33061,62740,70314,3051,75324,64540
Germany182,77375,551107,22242,10820,50844,60659
Greece2,2561,2371,0197422924845
Ireland117,97152,44065,5318,82315,45241,25656
Italy54,55534,63919,91611,5852,7005,63137
Luxumbourg360,243130,038230,20535,04930,963164,19364
Netherlands197,431127,46869,96321,76716,02132,17535
Portugal4,9462,4362,5101,20660270251
Spain17,2758,0289,2473,7589144,57554
Other Europe826,685465,506361,179113,48447,517200,17844
Denmark36,40119,89716,5046,2784,3075,91945
Iceland81564017542577621
Norway57,54928,56928,98014,7093,49710,77450
Sweden72,10046,47525,62513,7914,1897,64536
Switzerland188,472119,98068,49232,82412,33923,32936
United Kingdom471,348249,945221,40345,84023,128152,43547
Other developed1,249,238424,366824,872574,382115,380135,11066
Australia67,76646,61921,1474,9329,2077,00831
Canada276,206209,51866,68816,6766,08043,93224
Japan898,100162,408735,692552,11899,84583,72982
New Zealand7,1665,8211,34565624844119
Emerging markets1,612,565447,2011,165,364569,914298,099297,35172
Latin America87,92220,31167,61150,5157,3199,77777
Argentina6,8072,4184,3891,6231,2981,46864
Brazil15,3771,09114,28613,17039672093
Chile8,8483,2485,6003,7481,06179163
Colombia6,6687785,8903,6371,0611,19288
Mexico39,5779,34030,23724,9201,6113,70676
Peru1,01855146711416818546
Venezuela5,9241,8674,0571,8849611,21268
Uruguay3,7031,0182,6851,41976350373
Emerging Asia566,03815,806550,232328,142192,70729,38397
China322,8102,523320,287189,181114,90316,20399
India12,71745612,26112,185156196
Indonesia8,3803228,0585,1292,79313696
Korea81,78794180,84643,11933,8583,86999
Malaysia10,0741,2698,8057,4081,27412387
Pakistan0000000
Philippines5,1909194,2713,14383928982
Thailand3,5083103,1982,9814916891
Taiwan POC121,5729,066112,50664,99638,9768,53493
Financial centers807,427333,778473,649144,14380,296249,21059
Hong Kong SAR65,98422,49943,48527,64510,5185,32266
Singapore113,70371,53642,16724,6674,61512,88537
Caribbean financial centers 2/627,740239,743387,99791,83165,163231,00362
Emerging Europe29,76695228,81420,0298,29549097
Czech2,9503322,6181,4231,06413189
Hungary9597288749110828892
Poland8,4311538,2787,4388202098
Russia8,7062138,4932,1866,2891898
Turkey8,7201828,5388,491143398
Other emerging121,41276,35445,05827,0859,4828,49137
Israel15,1635,02010,1436,4011,4412,30167
Morocco000000
South Africa2,1921,9172751502210313
African oil exporters 3/1,3017685333331594141
Middle East oil exporters 4/102,75668,64934,10720,2017,8606,04633
World5,056,1181,863,3573,192,7611,413,425601,9131,177,42363
Of which: Reserves1,320,000134,0001,186,000923,000216,00047,00090
Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

The slant toward bonds owes importantly to large foreign official positions, given that foreign governments tend to hold neither equities nor corporate bonds. As seen at the bottom of Table 1, country-level holdings include a total of $1.32 trillion in foreign exchange reserves, 90 percent of which are in debt securities.9 If we omit the one developed country with large foreign official positions (Japan), developed country holdings of equities and bonds are about equal. In contrast, the vast majority of holdings by emerging market economies is in bonds (77 percent for Latin America, and 97 percent for emerging Asia).

The largest bond positions are held by Japan ($736 billion), China ($320 billion), the financial centers of the Caribbean ($388 billion), Belgium ($285 billion), Luxembourg ($230 billion), and the United Kingdom ($221 billion). The largest equity positions are held by the United Kingdom ($250 billion), the Caribbean financial centers ($240 billion), and Canada ($210 billion). In nominal terms, Japan is the country by far the most exposed to U.S. long-term securities.

B. Impact of Declines in the Dollar and U.S. Asset Prices

The results of a simple exercise in which the dollar, U.S. equity prices, and U.S. bond prices all fall by 10 percent can be inferred from Table 1. The reader should note two things about such an exercise. First, it assumes that positions are not hedged against currency risk, and the estimates should therefore be considered an upper bound. Second, the impact of the dollar decline is mitigated by the fact that 23 percent of foreigners’ holdings of U.S. agency bonds and U.S corporate bonds were denominated in foreign currencies as of 2004.

Based on these assumptions, the decline in the dollar and U.S. asset prices would reduce financial wealth outside the United States by a local currency value equivalent to about $1 trillion. Of this, about $250 billion would fall to losses on foreign exchange reserve positions. Japan stands to suffer the biggest nominal loss on account of its large bond holdings.

Table 2 relates the losses caused by the scenario to investors’ home-country GDP.10 Japan’s wealth loss (estimated at about 4 percentage points of GDP) is still higher than the average for countries without a financial center, but does not appear exorbitant. Other nonfinancial center countries with large U.S. exposures and include Ireland (wealth losses of 14.5 percentage points of GDP); Taiwan Province of China and the Netherlands (8 percentage points); and Canada, Norway, and Sweden (5–6 percentage points).11 China’s estimated wealth losses (4¼ percentage points of GDP) are comparable to Japan’s, and the average exposures of emerging markets and developed countries are also quite similar. Aggregated over all countries, the loss to foreign wealth would amount to 4 percentage points of GDP, with 1.1 percentage points accruing to losses on reserves positions.

Table 2.Impact on Wealth of Unanticipated Shocks, 2004 1/(In percent of GDP)
Impact on Foreign Holdings of U.S. Long-term Securities
Total

Holdings
EquitiesBonds
TotalTreasuryAgencyCorporate
Developed countries-3.9-1.7-2.3-1.0-0.3-0.9
Euro Area-3.1-1.3-1.9-0.4-0.3-1.2
Austria-1.3-0.8-0.5-0.1-0.2-0.2
Belgium-18.0-1.2-16.8-0.9-2.9-13.0
Finland-0.9-0.6-0.3-0.1-0.1-0.2
France-1.1-0.7-0.4-0.20.0-0.2
Germany-1.5-0.6-0.8-0.4-0.2-0.3
Greece-0.3-0.1-0.1-0.10.00.0
Ireland-14.5-6.8-7.7-1.1-1.8-4.8
Italy-0.7-0.5-0.3-0.20.0-0.1
Luxumbourg-255.3-98.2-157.2-26.5-20.7-110.0
Netherlands-7.5-5.0-2.5-0.9-0.6-1.1
Portugal-0.6-0.3-0.3-0.2-0.1-0.1
Spain-0.4-0.2-0.2-0.10.0-0.1
Other Europe-5.6-3.3-2.3-0.8-0.3-1.2
Denmark-3.3-1.9-1.4-0.6-0.4-0.5
Iceland-1.5-1.2-0.3-0.1-0.1-0.1
Norway-5.1-2.6-2.5-1.3-0.3-0.9
Sweden-4.7-3.1-1.6-0.9-0.2-0.4
Switzerland-11.5-7.5-4.0-2.1-0.7-1.3
United Kingdom-5.0-2.8-2.2-0.5-0.2-1.5
Other developed-4.2-1.5-2.8-2.0-0.4-0.4
Australia-2.5-1.8-0.7-0.2-0.3-0.2
Canada-6.3-4.9-1.4-0.4-0.1-0.9
Japan-4.1-0.8-3.3-2.6-0.4-0.3
New Zealand-1.8-1.5-0.3-0.2-0.1-0.1
Emerging markets-4.3-1.2-3.0-1.6-0.7-0.7
Latin America-1.1-0.3-0.8-0.6-0.1-0.1
Argentina-1.0-0.4-0.6-0.3-0.2-0.2
Brazil-0.60.0-0.6-0.50.00.0
Chile-2.4-0.9-1.5-1.0-0.3-0.2
Colombia-1.6-0.2-1.4-0.9-0.2-0.3
Mexico-1.2-0.3-0.9-0.80.0-0.1
Peru-0.3-0.2-0.10.00.0-0.1
Venezuela-1.4-0.4-0.9-0.5-0.2-0.3
Uruguay-6.4-1.8-4.5-2.5-1.2-0.8
Emerging Asia-3.1-0.1-3.0-1.9-1.0-0.2
China-4.30.0-4.3-2.7-1.4-0.2
India-0.40.0-0.4-0.40.00.0
Indonesia-0.70.0-0.6-0.4-0.20.0
Korea-2.60.0-2.5-1.4-1.0-0.1
Malaysia-1.9-0.2-1.7-1.4-0.20.0
Pakistan0.00.00.00.00.00.0
Philippines-1.3-0.2-1.0-0.8-0.2-0.1
Thailand-0.50.0-0.4-0.40.00.0
Taiwan POC-8.1-0.6-7.5-4.5-2.4-0.5
Financial centers-14.2-7.6-6.6-11.6-5.8-17.9
Hong Kong SAR-8.3-2.9-5.4-3.6-1.2-0.6
Singapore-24.2-15.5-8.7-5.3-0.9-2.5
Caribbean financial centers 2/------------
Emerging Europe-0.50.0-0.5-0.4-0.10.0
Czech-0.6-0.1-0.5-0.3-0.20.0
Hungary-0.20.0-0.2-0.10.0-0.1
Poland-0.80.0-0.8-0.7-0.10.0
Russia-0.40.0-0.4-0.1-0.30.0
Turkey-0.70.0-0.7-0.70.00.0
Other emerging-2.7-1.7-1.0-0.6-0.2-0.2
Israel-2.7-0.9-1.8-1.2-0.2-0.4
Morocco0.00.00.00.00.00.0
South Africa-0.3-0.20.00.00.00.0
African oil exporters 3/-0.2-0.1-0.10.00.00.0
Middle East oil exporters 4/-4.6-3.1-1.5-0.9-0.3-0.2
World-4.0-1.5-2.5-1.2-0.4-0.9
Of which: Reserves-1.1-0.1-1.0-0.8-0.20.0
Source: Author’s calculations based on datasets described in the text.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

The simulated market shocks would also impact the United States, of course. At the end of 2004, U.S. investors owned roughly $12.7 trillion in U.S. securities.12 An unexpected 10 percent decrease in equity and bond markets would reduce domestic wealth by $1.3 trillion (almost 11 percentage points of GDP). Partially offsetting this—under the unlikely assumption that foreign markets would not be affected by the shocks to U.S. financial markets—would be a $250 billion gain from the currency appreciation on $2.5 trillion worth in foreign equity holdings implying a net wealth loss of 9 percentage points of GDP.13 U.S. holdings of foreign-currency-denominated bonds are equivalent to only 10 percent of foreign equity holdings, a negligible amount (Burger and Warnock, 2004).

C. Evolution of Exposure: 1994 to 2004

U.S. liabilities data are also available for earlier years, including 1994 and 2000. For those two years, the tables in Appendices I and II provide the same information as Tables 12 for the year 2004. That is, information on foreign holdings of U.S. securities in these two years has been used to simulate the impact of a simultaneous 10 percent decline in the dollar and U.S. equity and bond markets as it would have been then.

The changes in the exposure of foreign countries to U.S. assets between 1994 and 2004 are summarized in Table 3. Overall, foreigners increased their holdings of U.S. securities by $4 trillion over the ten-year period, with developed countries comprising roughly two-thirds of that increase and emerging markets the rest. Reserves positions increased by $1 trillion over the decade. By country, the emergence of Belgium and Luxembourg as major custodial centers is evident by their combined $628 billion increase in U.S. positions. In emerging markets, China’s ascension as a major holder of U.S. securities is also evident (reflecting a $305 billion increase from its $18 billion position in 1994). In dollar terms, the largest increases are attributable to Japan ($668 billion) and the Caribbean financial centers ($536 billion).

Table 3.Change in Foreign Positions in U.S. Long-Term Securities, 1994–2004 1/
Change in Foreign Holdings of U.S. Long-term Securities (million U.S. dollars)
Total

Holdings
EquitiesBonds
TotalTreasuryAgencyCorporate
Developed countries2,701,9191,117,4141,584,505549,027241,625793,853
Euro Area1,166,817453,070713,74761,548129,559522,640
Austria11,1077,9313,176-8631,8952,144
Belgium271,2775,014266,2634,81044,994216,459
Finland5,1634,413750-296-3911,437
France82,55151,30931,2429,50391220,827
Germany115,25060,62754,623-3,98418,52940,078
Greece1,42882959936226211
Ireland112,20049,64062,5607,39014,77440,396
Italy45,49530,25115,2448,6672,5064,071
Luxumbourg356,314128,038228,27634,08430,546163,646
Netherlands165,860105,74160,11917,07614,70628,337
Portugal3,8402,3181,522500386636
Spain-3,6686,959-10,627-15,7016764,398
Other Europe586,643328,204258,43952,06036,107170,272
Denmark33,24318,16815,0755,6363,8835,556
Iceland815640175425776
Norway54,84628,18726,65912,4263,48110,752
Sweden65,28743,03022,25710,8063,9717,480
Switzerland130,98780,02050,96722,60311,83216,532
United Kingdom301,465158,159143,30654712,883129,876
Other developed948,459336,140612,319435,41975,959100,941
Australia57,36539,65517,7102,1389,0656,507
Canada218,040163,06054,9809,0225,59040,368
Japan667,888128,604539,284424,43461,08953,761
New Zealand5,1664,821345-175215305
Emerging markets1,317,377368,368949,009420,656265,355262,999
Latin America69,73314,64755,08640,3306,5818,175
Argentina2,7641,5041,260-1,3011,2571,304
Brazil14,23724713,99013,066313611
Chile7,4322,8154,6172,9661,021630
Colombia4,1253333,7921,7151,0001,077
Mexico33,6797,46226,21721,8241,3003,093
Peru79537841798153166
Venezuela2,9988902,108543774791
Uruguay3,7031,0182,6851,419763503
Emerging Asia489,36813,450475,918262,155185,31928,444
China304,6292,388302,241171,937114,41515,889
India11,69816711,53111,5041215
Indonesia6,4651746,2913,3762,789126
Korea76,03979675,24338,59532,9683,680
Malaysia4,3651,1363,2291,9011,27157
Pakistan000000
Philippines2,5735751,998917826255
Thailand-3,331179-3,510-3,71348155
Taiwan POC86,9308,03578,89537,63832,9908,267
Financial centers659,941283,371376,57093,90860,226222,436
Hong Kong SAR44,60716,60528,00216,9817,3063,715
Singapore79,61363,40216,2113,9392,12310,149
Caribbean financial centers 2/535,721203,364332,35772,98850,797208,572
Emerging Europe25,76476325,00116,3218,261419
Czech2,3323242,0088131,064131
Hungary82955774379108287
Poland5,4961195,3774,582820-25
Russia8,5001608,3402,0716,2609
Turkey8,6071058,5028,476917
Other emerging72,57156,13716,4347,9424,9683,525
Israel11,4043,8747,5305,0541,1661,310
Morocco000000
South Africa2,1101,84626414519100
African oil exporters 3/1,30176853333315941
Middle East oil exporters 4/57,75649,6498,1072,4103,6242,074
World4,019,2961,485,7822,533,514969,682506,9801,056,852
Of which: Reserves1,011,000101,000910,000663,000205,00042,000
Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

The change in the potential impact of U.S. financial market shocks between 1994 and 2004 is shown in Figures 1 and 2 for developed countries and emerging markets, respectively. Each graph compares the wealth loss based on data for 2004 with the outcome based on 1994 exposures, scaled by the level of home-country GDP in the respective years. Figure 3 includes the main outliers (Luxembourg, Hong Kong, SAR, Singapore, and Middle East oil exporters). The figures correspond to values in Tables 2 and B2.

Figure 1.The Impact on Wealth of Shocks to U.S. Financial Markets on Developed Countries 1/

Source: Author’s calculations based on datasets described in the text.

1/ The figures show the estimated effects of a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices in 1994 and 2004. For example, the occurrence of such a scenario in 2004 would have led to losses of 6.3 percent of GDP for Canadian investors; the impact in 1994 would have been 2.0 percent of GDP. Data points above the 45 degree line indicate that exposure to the United States has increased over time.

Figure 2.The Impact on Wealth of Shocks to U.S. Financial Markets on Emerging Markets 1/

Source: Author’s calculations based on datasets described in the text.

1/ The figures show the estimated effects of a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices in 1994 and 2004. For example, the occurrence of such a scenario in 2004 would have led to losses of 4.3 percent of GDP for Chinese investors; the impact in 1994 would have been 0.6 percent of GDP. Data points above the 45 degree line indicate that exposure to the United States has increased over time.

Figure 3.The Impact on Wealth of Shocks to U.S. Financial Markets on Financial Centers and Middle East Oil Exporters 1/

Source: Author’s calculations based on datasets described in the text.

1/ The figures show the estimated effects of a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices in 1994 and 2004. For example, the occurrence of such a scenario in 2004 would have led to losses of 24.2 percent of GDP for Singaporean investors; the impact in 1994 would have been 10.2 percent of GDP.

Data points above the 45 degree line indicate that exposure to the United States has increased over time.

Figure 1 shows that the exposure to U.S. security markets of almost every developed country has increased over the past decade; that is, almost every point lies above the 45 degree line. To take one country as an example, 10 percent declines in the dollar and U.S. bond and equity prices in 2004 would lead to wealth losses for Canadian investors of 6¼ percentage points of Canadian GDP, whereas in 1994—when Canadian positions were smaller relative to GDP—the impact on Canada’s wealth would have been only 2 percentage points of GDP.

The evidence for emerging markets is similar (Figure 2). Almost every country has increased its exposure to U.S. security markets. For example, the simulated shocks would lead to wealth losses for Chinese investors (including the Chinese government) of over 4 percentage points of GDP, whereas in 1994 the impact would have been less than ¾ of a percentage point of GDP.

D. Exposure to Dollar Bonds Issued by Third Countries

The exercise is completed by quantifying foreigners’ U.S. dollar exposure as a result of holding dollar-denominated bonds issued by third countries. Table 4 shows the amount of dollar-denominated bonds outstanding by the country of issuer as of December 2003. Unfortunately, I do not have data that would allow us to disentangle exposure by country of investor. However, Table 4 indicates that dollar-denominated bonds issued by non-U.S. entities account for about the outstanding $1.5 trillion, of which $0.5 trillion is held by U.S. investors.14 The remaining $1 trillion can be added to the $3.2 trillion in foreign countries’ exposure to U.S. bond markets (as depicted in Table 1). In the simulations, this implies that non-U.S. investors would take an additional $200 billion wealth loss if the price of dollar-denominated bonds and the dollar each fall by 10 percent.

Table 4.Stock of U.S. Dollar-Denominated Debt Issued by Foreign Entities, December 2003 1/
Total

Outstanding
Held by U.S

Investors
Held by Foreign

Investors
Developed countries1,071,711357,591714,120
Euro Area445,969101,380344,589
Austria25,9693,18522,784
Belgium3,1501,6411,509
Finland8,9873,8515,136
France67,82119,60848,213
Germany95,65111,33284,319
Greece2,2612372,024
Ireland15,8443,31612,528
Italy47,83110,30137,530
Luxumbourg31,35911,37719,982
Netherlands127,71335,09092,623
Portugal2,5851262,459
Spain16,7981,31615,482
Other Europe342,235121,328220,907
Denmark6,7711,7605,011
Iceland1,156951,061
Norway19,0956,61912,476
Sweden22,3056,17716,128
Switzerland3,0545322,522
United Kingdom289,854106,145183,709
Other developed283,507134,883148,624
Australia85,88222,60963,273
Canada159,489108,24951,240
Japan34,6032,48832,115
New Zealand3,5331,5371,996
Emerging markets447,401106,487340,914
Latin America226,30466,166160,138
Argentina60,4283,27157,157
Brazil73,00017,92555,075
Chile12,3997,5074,892
Colombia10,7703,1437,627
Mexico46,45126,21120,240
Peru5,0122,9122,100
Venezuela14,8374,66610,171
Uruguay3,4075312,876
Emerging Asia126,74912,896113,853
China9,6826329,050
India3,3901813,209
Indonesia2,9954802,515
Korea46,3153,88842,427
Malaysia18,1153,71714,398
Pakistan000
Philippines22,1683,19618,972
Thailand5,1146524,462
Taiwan POC18,97015018,820
Financial centers40,7584,00636,752
Hong Kong SAR25,7971,30124,496
Singapore14,9612,70512,256
Caribbean financial centers 2/000
Emerging Europe41,00810,98530,023
Czech70010690
Hungary1,3502741,076
Poland5,2778114,466
Russia18,9708,12110,849
Turkey14,7111,76912,942
Other emerging12,58212,434148
Israel8,43911,121-2,682
Morocco000
South Africa4,1431,3132,830
African oil exporters 3/000
Middle East oil exporters 4/000
World1,519,112464,0781,055,034
Source: Author’s calculations based on datasets described in the text.

In million U.S. dollars. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

In million U.S. dollars. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

III. Another View of Exposure in 2004: U.S. Liabilities Implied by CPIS Data

In this section I turn to another prominent data source, the IMF’s Coordinated Portfolio Investment Survey (CPIS) data.15 After discussing important characteristics of the CPIS data, I present implied U.S. liabilities positions and utilize them to form a second set of estimates of the impact of a disorderly resolution of global imbalances.

A. cpis Data

As noted in the introduction, the CPIS data differs from U.S. benchmark liabilities data along a number of dimensions. First, the CPIS is the IMF’s compilation of asset surveys for the year 2004 contributed by 71 countries. For our purposes, this is a good attribute. Asset surveys are more informative than liabilities surveys in that they should not suffer from a custodial center bias. However, because few countries actually conduct full-blown benchmark surveys to compile the data submitted to the IMF, the quality of CPIS data is largely unknown. Considering the substantial errors in early attempts to create bilateral U.S. positions—see Warnock (2001) revisiting of the well-cited Tesar and Werner (1995) results—there is reason to suspect that data errors might be substantial for countries that are measuring bilateral holdings for the first time and not following best practices.

Caveats aside, the CPIS data are an excellent new resource whose quality will surely improve over time. CPIS data can be used to compute implied U.S. liabilities by summing the amount of U.S. securities owned by residents and reported by each participating country. However, CPIS-based implied liabilities are not directly comparable with the U.S. liabilities data:

  • Country-level CPIS data should include only the positions of private foreigners, given that foreign official positions are reported in aggregate and not on a country-level basis. In contrast, U.S. benchmark surveys include foreign official holdings with the holdings of private investors in the country-level data, but do not break them out separately at the country level. Thus, at the individual country level, CPIS data should include only private investors, while U.S. data will include both private and foreign officials.
  • For most developed countries, the CPIS and U.S. data should be comparable since their international reserves are not large relative to residents’ holdings, with Japan being the notable exception. Developing countries have larger reserves positions, almost exclusively in bonds. For these countries, CPIS-reported bond holdings can vary substantially from data reported by U.S. liabilities surveys.

CPIS data first became available as of the end of 1997. However, only 29 countries participated, so the 1997 data are not appropriate to construct implied liabilities. The next CPIS, in 2001, included 63 countries, and in 2004 the number increased to 71. In what follows I use only the December 2004 CPIS data and compare it to the June 2004 U.S. data.

B. CPIS Data: Implied U.S. Liabilities and Impact of U.S. Financial Market Shocks

The result of the CPIS exercise are presented in Table 5. I make one modification to the CPIS data since China and Taiwan Province of China, who had the second and third largest international reserves positions in 2004 (ECB, 2006), did not participate in the CPIS. I have added the estimated positions in U.S. securities ($562.1 billion) of these two countries to the “Reserves” amount for emerging markets.16

Table 5.CPIS-Reported Foreign Positions in U.S. Long-Term Securities, 2004 1/(millions of U.S. dollars unless otherwise indicated)
TotalEquitiesBondsShare of Bonds

(In percent)
Developed countries2,964,3641,397,9961,566,36853
Euro Area1,205,017610,930594,08749
Austria23,0258,86514,16062
Belgium29,55613,01416,54256
Finland10,7125,7844,92846
France180,72762,795117,93265
Germany131,60363,86967,73551
Greece4,4831,6732,81063
Ireland172,61691,80980,80747
Italy98,29335,23363,06064
Luxumbourg250,273144,168106,10542
Netherlands254,239171,58382,65633
Portugal6,4071,2115,19681
Spain43,08310,92632,15775
Other Europe780,665372,273408,39252
Denmark35,94617,49018,45651
Iceland1,4131,315987
Norway59,66731,17028,49748
Sweden74,06153,88720,17427
Switzerland96,35454,90241,45243
United Kingdom513,224213,509299,71458
Other developed978,682414,793563,88958
Australia83,13264,07119,06123
Canada201,768166,75835,01017
Japan681,979176,190505,78974
New Zealand11,8037,7754,02834
Emerging markets362,26873,341288,92780
Latin America26,30213,95312,34947
Argentina12,1496,4365,71347
Brazil1,11183727425
Chile4,6744,2324429
Colombia1,3561651,19188
Mexico3,5302,1861,34438
Peru0000
Venezuela2,944192,92599
Uruguay5397846185
Emerging Asia15,0702,67912,39182
China--------
India0000
Indonesia1981197100
Korea12,5602,41710,14381
Malaysia4789238581
Pakistan0000
Philippines1,4671401,32790
Thailand3672833992
Taiwan POC--------
Financial centers291,52646,532244,99484
Hong Kong SAR55,86712,73743,13077
Singapore27,88110,48817,39362
Caribbean financial centers 2/207,77823,307184,47189
Emerging Europe5,5555175,03891
Czech84721862974
Hungary1801334726
Poland12612600
Russia4,109234,08699
Turkey2931727694
Other emerging23,8169,66014,15659
Israel10,5242,9777,54772
Morocco0000
South Africa6,5495,88566410
African oil exporters 3/--------
Middle East oil exporters 4/6,7437985,94588
Other 5/103,02322,79280,23078
Reserves 6/1,444,93901,444,939100
Developed Countries413,8250413,825100
Emerging Markets 6/1,031,11401,031,114100
World4,874,5931,494,1293,380,46469
Source: Author’s calculations based on IMF’s Coordinated Portfolio Investment Survey.

In million U.S. dollars. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Other includes all CPIS participants that are not listed above.

Includes author’s estimates for China and Taiwan POC as described in footnote 16.

Source: Author’s calculations based on IMF’s Coordinated Portfolio Investment Survey.

In million U.S. dollars. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Other includes all CPIS participants that are not listed above.

Includes author’s estimates for China and Taiwan POC as described in footnote 16.

The total amount of positions derived from the CPIS data are remarkably similar to those in Table 1. Overall CPIS-reported foreign positions in U.S. securities amount to $4,875 billion as of December 2004, compared to $5,056 billion in Table 1 (as of June 2004). CPIS-reported reserves (with my additions of China and Taiwan POC) amount to $1.44 trillion, comparable to the $1.32 trillion reported in the U.S. data.17 The country-level data are also comparable if one recalls that reserves are not included in the country-level data in Table 5. Notable exceptions are the Caribbean, where amounts reported by the CPIS are much smaller (as expected, since the CPIS does not suffer from such a severe custodial center bias), and Ireland, where CPIS amounts are surprisingly much greater than the U.S. data.18

The CPIS data allows us to separate out and focus on international reserves. Reserves are reported in the CPIS only in aggregate, but I have estimated the portions attributable to emerging markets and developed countries.19 Based on my calculations, emerging markets hold $1,031 billion of the $1,444 billion in reserve positions in U.S. securities.

Not surprisingly, given that the CPIS and U.S. benchmark amounts are similar, the calculated impact on wealth of shocks to U.S. financial markets on the basis of CPIS data is of a similar magnitude. The loss in wealth amounts to less than $1 trillion in foreign currency terms or 3.9 percentage points of foreign GDP (Table 6).20 A comparison of Tables 2 and 6 indicates that custodial center bias is largely absent from the CPIS data, although the impact on Luxembourg is still implausibly large, and Ireland’s impact is actually larger using the CPIS data. Overall, the CPIS data confirm that foreign wealth would decrease by roughly 4 percentage points of foreign GDP in a simulation exercise using only their U.S. securities holdings. Adding holdings of third-country dollar-denominated bonds also brings the total amount to roughly 5 percentage points of GDP. Based just on their reserves positions, emerging market governments stand to lose wealth equivalent to 2.7 percentage points of GDP in such a scenario (Table 6).

Table 6.CPIS Data: Impact on Wealth of Unanticipated Shocks, 2004 1/(In percent of GDP)
Impact on Foreign Holdings of U.S. Long-term Securities
Total

Holdings
EquitiesBonds
Developed countries-3.4-1.7-1.8
Euro Area-2.9-1.5-1.4
Austria-1.8-0.7-1.1
Belgium-1.9-0.9-1.0
Finland-1.3-0.7-0.6
France-2.0-0.7-1.3
Germany-1.1-0.5-0.5
Greece-0.5-0.2-0.3
Ireland-22.0-11.9-10.0
Italy-1.3-0.5-0.8
Luxumbourg-185.1-108.8-76.3
Netherlands-9.8-6.7-3.1
Portugal-0.8-0.2-0.7
Spain-1.0-0.3-0.7
Other Europe-5.3-2.6-2.7
Denmark-3.3-1.7-1.7
Iceland-2.7-2.5-0.2
Norway-5.3-2.8-2.5
Sweden-4.8-3.6-1.3
Switzerland-5.9-3.4-2.5
United Kingdom-5.6-2.4-3.2
Other developed-3.3-1.4-1.9
Australia-3.1-2.5-0.7
Canada-4.7-3.9-0.8
Japan-3.1-0.8-2.2
New Zealand-2.9-2.0-1.0
Emerging markets-1.0-0.2-0.8
Latin America-0.3-0.2-0.1
Argentina-1.8-1.0-0.8
Brazil0.00.00.0
Chile-1.3-1.2-0.1
Colombia-0.30.0-0.3
Mexico-0.1-0.10.0
Peru0.00.00.0
Venezuela-0.70.0-0.7
Uruguay-0.9-0.1-0.8
Emerging Asia-0.10.0-0.1
China------
India0.00.00.0
Indonesia0.00.00.0
Korea-0.4-0.1-0.3
Malaysia-0.10.0-0.1
Pakistan0.00.00.0
Philippines-0.40.0-0.3
Thailand0.00.00.0
Taiwan POC------
Financial centers-6.5-1.9-4.7
Hong Kong SAR-6.9-1.6-5.3
Singapore-5.9-2.3-3.6
Caribbean financial centers 2/------
Emerging Europe-0.10.0-0.1
Czech-0.20.0-0.1
Hungary0.00.00.0
Poland0.00.0
Russia-0.20.0-0.2
Turkey0.00.00.0
Other emerging-0.5-0.2-0.3
Israel-1.8-0.5-1.3
Morocco0.00.00.0
South Africa-0.8-0.7-0.1
African oil exporters 3/------
Middle East oil exporters 4/-0.30.0-0.3
Other 5/------
Reserves 6/-1.10.0-1.1
Developed Countries-0.50.0-0.5
Emerging Markets 6/-2.70.0-2.7
World-3.9-1.2-2.7
Source: Author’s calculations based on IMF’s Coordinated Portfolio Investment Survey.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that all equity holdings and 90.6 percent of bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Other includes all CPIS participants that are not listed above.

Includes author’s estimates for China and Taiwan POC as described in footnote 16.

Source: Author’s calculations based on IMF’s Coordinated Portfolio Investment Survey.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that all equity holdings and 90.6 percent of bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Other includes all CPIS participants that are not listed above.

Includes author’s estimates for China and Taiwan POC as described in footnote 16.

IV. Conclusion

Using two complementary datasets, this paper documents foreign countries’ exposure to U.S. securities markets. The analysis suggests that were we to witness a simultaneous, unexpected 10 percent decrease in the U.S. dollar, U.S. equity markets, and dollar-denominated bonds, foreigners would, in sum, lose roughly $1.2 trillion in foreign currency terms of financial wealth, an amount equivalent to almost 5 percentage points of non-U.S. GDP. I present four stylized facts concerning exposure to U.S. securities markets: (i) foreign countries, particularly emerging markets, are more exposed to U.S. bonds than U.S. equities; (ii) over the past decade, U.S. exposure relative to GDP has increased significantly for most countries; (iii) on average, U.S. asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserve positions, the wealth losses for emerging market governments could, on average, amount to 2¾ percentage points of GDP.

There are many useful extensions to this work. For example, scaling exposure by wealth instead of GDP is a worthwhile endeavor. Similarly, for certain purposes, one might want to scale by a country’s trade balance. A more thorough analysis would include the impact of U.S. financial shocks on investment income streams, as a dollar depreciation would also impact dividends and coupon payments. Finally, folding into the analysis other types of positions—such as banking positions and foreign direct investment—could be worthwhile.

APPENDIX I
Table A1.Foreign Positions in U.S. Long-Term Securities, March 2000 1/
Foreign Holdings of U.S. Long-term Securities (million U.S. dollars)
Total

Holdings
EquitiesBondsShare of Bonds

(In percent)
TotalTreasuryAgencyCorporate
Developed countries2,220,5601,311,486909,074493,687133,619281,76841
Euro Area760,435454,251306,184149,08941,853115,24240
Austria15,4197,8607,5594,3591,9841,21649
Belgium61,26427,71633,5487,1513,92322,47455
Finland4,0382,1281,9101,30817442847
France74,95852,95422,00410,3201,60910,07529
Germany206,787109,11097,67754,9908,05034,63747
Greece2,9761,3831,5931,3951079154
Ireland47,40328,10619,2975,4744,9078,91641
Italy61,05538,14822,90718,5511,9202,43638
Luxumbourg107,34169,02138,32013,7794,03020,51136
Netherlands139,568106,07833,49012,7239,76511,00224
Portugal3,7211,5242,1971,06229284359
Spain35,90510,22325,68217,9775,0922,61372
Other Europe787,630517,054270,576102,59239,091128,89334
Denmark17,72513,4824,2432,47889187424
Iceland546526206410
Norway9,1966,9182,2781,92510325025
Sweden39,05926,93312,1267,1192,9222,08531
Switzerland187,372147,70939,66317,6565,20416,80321
United Kingdom533,732321,486212,24673,40829,967108,87140
Other developed672,495340,181332,314242,00652,67537,63349
Australia28,14520,0878,0584,6031,3082,14729
Canada209,439173,73935,70014,1338,64112,92617
Japan430,589144,468286,121221,24642,64622,22966
New Zealand4,3221,8872,4352,0248033156
Emerging markets899,372316,092583,280344,064108,444130,77265
Latin America56,39113,38443,00730,8189,6122,57776
Argentina10,3482,3987,9505,7951,64351277
Brazil9,5031,6347,8697,37719429883
Chile4,7871,2623,5253,12615824174
Colombia5,0859214,1643,32839743982
Mexico16,0613,27912,7827,6274,78237380
Peru3252626312302119
Venezuela7,1622,4894,6732,3661,90440365
Uruguay3,1201,1391,9811,187504290
Emerging Asia217,74111,847205,894163,89540,5161,48395
China92,2311,39890,83371,05619,62215598
India4,0056443,3613,30455284
Indonesia10,0215199,5028,9591353095
Korea39,06858038,48823,77214,6189899
Malaysia3,0125102,5022,398210283
Pakistan28627214833
Philippines5,6309124,7183,0431,53713884
Thailand11,42442710,99710,97491496
Taiwan POC52,0646,58545,47940,3814,70739187
Financial centers510,821233,464277,357109,18347,101121,07354
Hong Kong SAR76,28218,31257,97038,16017,6912,11976
Singapore82,20737,34144,86634,1944,5946,07855
Caribbean financial centers 2/352,332177,811174,52136,82924,816112,87650
Emerging Europe21,4701,73019,74014,3845,3263092
Czech1991277244181036
Hungary973125848500345387
Poland11,2799311,1869,7251,457499
Russia7,1463366,8103,2983,5021095
Turkey1,8731,0498248174344
Other emerging92,94955,66737,28225,7845,8895,60940
Israel12,3834,5567,8275,5891,1791,05963
Morocco000000
South Africa8,7048,083621487161187
African oil exporters 3/510474362232
Middle East oil exporters 4/71,35242,55428,79819,7064,6924,40040
World3,119,9321,627,5781,492,354837,751242,063412,54048
Of which: Reserves691,00096,000595,000492,00091,00012,00086
Source: Author’s calculations based on datasets described in the text

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Table A2.Impact on Wealth of Unanticipated Shocks, 2000 1/(In percent of GDP)
Impact on Foreign Holdings of U.S. Long-term Securities
Total

Holdings
EquitiesBonds
TotalTreasuryAgencyCorporate
Developed countries-3.0-1.8-1.2-0.7-0.2-0.3
Euro Area-2.3-1.4-0.9-0.5-0.1-0.3
Austria-1.5-0.8-0.7-0.4-0.2-0.1
Belgium-4.6-2.2-2.4-0.6-0.3-1.6
Finland-0.6-0.3-0.3-0.20.0-0.1
France-1.0-0.7-0.3-0.10.0-0.1
Germany-2.0-1.1-0.9-0.5-0.1-0.3
Greece-0.5-0.2-0.2-0.20.00.0
Ireland-10.7-6.5-4.1-1.3-1.0-1.8
Italy-1.0-0.7-0.4-0.30.00.0
Luxumbourg-113.4-74.9-38.6-14.9-3.9-19.7
Netherlands-6.9-5.3-1.6-0.6-0.4-0.5
Portugal-0.6-0.3-0.4-0.20.0-0.1
Spain-1.2-0.3-0.8-0.6-0.2-0.1
Other Europe-6.7-4.5-2.2-0.9-0.3-1.0
Denmark-2.0-1.6-0.5-0.3-0.1-0.1
Iceland-1.3-1.20.00.00.00.0
Norway-1.2-0.9-0.3-0.20.00.0
Sweden-3.2-2.2-1.0-0.6-0.2-0.2
Switzerland-13.5-10.8-2.7-1.3-0.3-1.1
United Kingdom-7.1-4.4-2.7-1.0-0.4-1.3
Other developed-2.4-1.2-1.1-0.9-0.2-0.1
Australia-1.4-1.0-0.4-0.2-0.1-0.1
Canada-6.4-5.3-1.0-0.4-0.2-0.4
Japan-1.9-0.6-1.2-1.0-0.2-0.1
New Zealand-1.7-0.8-1.0-0.80.0-0.1
Emerging markets-3.0-1.1-1.9-1.2-0.3-0.4
Latin America-0.6-0.2-0.5-0.4-0.10.0
Argentina-0.7-0.2-0.6-0.4-0.10.0
Brazil-0.3-0.1-0.3-0.20.00.0
Chile-1.4-0.4-1.0-0.90.0-0.1
Colombia-1.2-0.2-1.0-0.8-0.1-0.1
Mexico-0.6-0.1-0.5-0.3-0.20.0
Peru-0.1-0.10.00.00.00.0
Venezuela-1.3-0.5-0.8-0.5-0.3-0.1
Uruguay-3.0-1.1-1.9-1.2-0.4-0.3
Emerging Asia-1.6-0.1-1.5-1.2-0.30.0
China-1.70.0-1.7-1.3-0.30.0
India-0.20.0-0.1-0.10.00.0
Indonesia-1.7-0.1-1.6-1.50.0-0.1
Korea-1.80.0-1.7-1.1-0.60.0
Malaysia-0.8-0.1-0.6-0.60.00.0
Pakistan
Philippines-1.4-0.2-1.1-0.8-0.30.0
Thailand-1.9-0.1-1.8-1.80.00.0
Taiwan POC-3.8-0.5-3.3-3.0-0.30.0
Financial centers-35.7-16.9-18.8-7.9-3.0-7.8
Hong Kong SAR-8.4-2.1-6.3-4.3-1.8-0.2
Singapore-16.3-7.5-8.8-6.9-0.8-1.1
Caribbean financial centers 2/
Emerging Europe-0.60.0-0.5-0.4-0.10.0
Czech-0.10.00.00.00.00.0
Hungary-0.4-0.1-0.3-0.2-0.10.0
Poland-1.40.0-1.4-1.2-0.20.0
Russia-0.60.0-0.5-0.3-0.30.0
Turkey-0.2-0.1-0.1-0.10.00.0
Other emerging-3.5-2.1-1.4-1.0-0.2-0.2
Israel-2.3-0.9-1.5-1.1-0.2-0.2
Morocco
South Africa-1.3-1.3-0.1-0.10.00.0
African oil exporters 3/-0.1-0.10.00.00.00.0
Middle East oil exporters 4/-8.3-5.0-3.3-2.3-0.5-0.5
World-3.0-1.6-1.4-0.8-0.2-0.4
Of which: Reserves-0.7-0.1-0.6-0.5-0.10.0
Source: Author’s calculations based on datasets described in the text

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

APPENDIX II
Table B1.Foreign Positions in U.S. Long-Term Securities, December 1994 1/
Foreign Holdings of U.S. Long-term Securities (million U.S. dollars)
Total

Holdings
EquitiesBondsShare of Bonds

(In Percent)
TotalTreasuryAgencyCorporate
Developed countries741,634298,742442,892294,48462,18986,21960
Euro Area200,81373,214127,59994,09711,35822,14464
Austria6,5782,2954,2832,3106161,35765
Belgium31,40213,07518,3279,1693,9655,19358
Finland2,323922,2311,17289616396
France19,77910,3189,4614,8028413,81848
Germany67,52314,92452,59946,0921,9794,52878
Greece82840842038033751
Ireland5,7712,8002,9711,43367886051
Italy9,0604,3884,6722,9181941,56052
Luxumbourg3,9292,0001,92996541754749
Netherlands31,57121,7279,8444,6911,3153,83831
Portugal1,1061189887062166689
Spain20,9431,06919,87419,45923817795
Other Europe240,042137,302102,74061,42411,41029,90643
Denmark3,1581,7291,42964242436345
Iceland000000
Norway2,7033822,3212,283162286
Sweden6,8133,4453,3682,98521816549
Switzerland57,48539,96017,52510,2215076,79730
United Kingdom169,88391,78678,09745,29310,24522,55946
Other developed300,77988,226212,553138,96339,42134,16971
Australia10,4016,9643,4372,79414250133
Canada58,16646,45811,7087,6544903,56420
Japan230,21233,804196,408127,68438,75629,96885
New Zealand2,0001,0001,0008313313650
Emerging markets295,18878,833216,355149,25832,74434,35273
Latin America18,1895,66412,52510,1857381,60269
Argentina4,0439143,1292,9244116477
Brazil1,1408442961048310926
Chile1,4164339837824016169
Colombia2,5434452,0981,9226111583
Mexico5,8981,8784,0203,09631161368
Peru2231735016151922
Venezuela2,9269771,9491,34118742167
Uruguay000000
Emerging Asia76,6702,35674,31465,9877,38893997
China18,18113518,04617,24448831499
India1,01928973068134672
Indonesia1,9151481,7671,75341092
Korea5,7481455,6034,52489018997
Malaysia5,7091335,5765,50736698
Pakistan000000
Philippines2,6173442,2732,226133487
Thailand6,8391316,7086,69411398
Taiwan POC34,6421,03133,61127,3585,98626797
Financial centers147,48650,40797,07950,23520,07026,77466
Hong Kong SAR21,3775,89415,48310,6643,2121,60772
Singapore34,0908,13425,95620,7282,4922,73676
Caribbean financial centers 2/92,01936,37955,64018,84314,36622,43160
Emerging Europe4,0021893,8133,708347195
Czech61886106100099
Hungary130171131120187
Poland2,935342,9012,85604599
Russia2065315311529974
Turkey11377361551632
Other emerging48,84120,21728,62419,1434,5144,96659
Israel3,7591,1462,6131,34727599170
Morocco000000
South Africa82711153313
African oil exporters 3/000000
Middle East oil exporters 4/45,00019,00026,00017,7914,2363,97258
World1,036,822377,575659,247443,74394,933120,57164
Of which: Reserves309,00033,000276,000260,00011,0005,00089
Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Table B2.Impact on Wealth of Unanticipated Shocks, 1994 1/(In percent of GDP)
Impact on Foreign Holdings of U.S. Long-term Securities
Total

Holdings
EquitiesBonds
TotalTreasuryAgencyCorporate
Developed countries-1.1-0.5-0.6-0.4-0.1-0.1
Euro Area-0.6-0.2-0.4-0.30.0-0.1
Austria-0.6-0.2-0.4-0.2-0.1-0.1
Belgium-2.6-1.1-1.5-0.8-0.3-0.4
Finland-0.50.0-0.4-0.2-0.20.0
France-0.3-0.2-0.1-0.10.0-0.1
Germany-0.6-0.1-0.5-0.40.00.0
Greece-0.2-0.1-0.1-0.10.00.0
Ireland-2.3-1.2-1.2-0.6-0.2-0.3
Italy-0.2-0.1-0.1-0.10.00.0
Luxumbourg-4.8-2.5-2.3-1.2-0.5-0.6
Netherlands-1.8-1.3-0.5-0.3-0.1-0.2
Portugal-0.20.0-0.2-0.20.00.0
Spain-0.80.0-0.8-0.70.00.0
Other Europe-2.6-1.5-1.1-0.7-0.1-0.3
Denmark-0.4-0.2-0.2-0.1-0.10.0
Iceland0.00.00.00.00.00.0
Norway-0.5-0.1-0.4-0.40.00.0
Sweden-0.7-0.3-0.3-0.30.00.0
Switzerland-4.3-3.0-1.3-0.80.0-0.5
United Kingdom-3.1-1.7-1.4-0.8-0.2-0.4
Other developed-1.1-0.3-0.8-0.5-0.1-0.1
Australia-0.6-0.4-0.2-0.20.00.0
Canada-2.0-1.6-0.4-0.30.0-0.1
Japan-1.0-0.2-0.9-0.6-0.2-0.1
New Zealand-0.9-0.4-0.4-0.40.0-0.1
Emerging markets-1.2-0.3-0.9-0.6-0.1-0.1
Latin America-0.3-0.1-0.2-0.10.00.0
Argentina-0.3-0.1-0.2-0.20.00.0
Brazil0.00.00.00.00.00.0
Chile-0.6-0.2-0.4-0.30.0-0.1
Colombia-0.9-0.2-0.7-0.70.00.0
Mexico-0.3-0.1-0.2-0.20.00.0
Peru-0.1-0.10.00.00.00.0
Venezuela-1.0-0.3-0.6-0.5-0.1-0.1
Uruguay0.00.00.00.00.00.0
Emerging Asia-0.80.0-0.7-0.7-0.10.0
China-0.60.0-0.6-0.50.00.0
India-0.10.0-0.10.00.00.0
Indonesia-0.20.0-0.2-0.20.00.0
Korea-0.30.0-0.3-0.20.00.0
Malaysia-1.70.0-1.6-1.60.00.0
Pakistan
Philippines-0.8-0.1-0.7-0.70.00.0
Thailand-1.10.0-1.0-1.00.00.0
Taiwan POC-2.8-0.1-2.7-2.2-0.40.0
Financial centers-14.8-5.2-9.6-5.2-1.9-2.5
Hong Kong SAR-3.3-0.9-2.4-1.7-0.5-0.2
Singapore-10.2-2.5-7.7-6.3-0.7-0.7
Caribbean financial centers 2/
Emerging Europe-0.10.0-0.1-0.10.00.0
Czech-0.40.0-0.4-0.40.00.0
Hungary-0.10.0-0.1-0.10.00.0
Poland-0.60.0-0.6-0.60.00.0
Russia0.00.00.00.00.00.0
Turkey0.00.00.00.00.00.0
Other emerging-2.1-0.9-1.2-0.9-0.2-0.2
Israel-0.9-0.3-0.6-0.3-0.1-0.2
Morocco
South Africa0.00.00.00.00.00.0
African oil exporters 3/0.00.00.00.00.00.0
Middle East oil exporters 4/-6.6-2.8-3.7-2.7-0.6-0.5
World-1.1-0.4-0.7-0.5-0.1-0.1
Of which: Reserves-0.30.0-0.3-0.30.00.0
Source: Author’s calculations based on datasets described in the text.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: Author’s calculations based on datasets described in the text.

The shock is based on a simultaneous and unanticipated 10 percent decline in the value of the dollar, 10 percent fall in equity prices, and 10 percent fall in bond prices. It is assumed that 77 percent of Agency and Corporate bond holdings are in U.S. dollars, with the rest in foreign currency. Aggregates include only those countries listed individually.

Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.

Algeria, Gabon, Libya, and Nigeria.

Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

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1Darden Business School (University of Virginia), the Institute for International Integration Studies IIIS, and National Bureau of Economic Research (NBER). The paper was written while the author was a consultant with IMF. The author thanks Tamim Bayoumi, Philip Lane, and Charlie Thomas for helpful comments.
2Issuing dollar-denominated bonds, to the extent they are held by investors from other countries, reduces a country’s exposure to dollar depreciation, in the sense that its liabilities are reduced. I focus instead on the exposure of portfolio assets.
3The countries that followed best practices as I have defined them were Hong Kong, SAR, Israel, Poland, and the United States. It is likely that other countries also submitted high-quality data.
4Lane and Milesi-Ferretti (2005) also use CPIS data to compute implied liabilities.
5All effects in this paper are linear, so the reader can scale my estimates to reflect any desired scenario. Detailed spreadsheets corresponding to all tables in this paper are available at http://faculty.darden.virginia.edu/warnockf/research.htm.
6Co-movements of major international markets are studied by Goetzmann, Li, and Rouwenhorst (2005) and Brooks and del Negro (2004, 2006), among others.
7I focus on long-term securities (that is, bonds and equities) and do not include other foreign investment such as foreign direct investment or banking positions.
8The sum of foreign holdings over all countries listed in Table 1 is equal to $5,056 billion. Total foreign holdings amount to $5,418 billion. The difference owes to the holdings of “Country Unknown” ($224 billion in holdings of bearer bonds by unknown foreigners), International Organizations ($53 billion), and $85 billion spread out over many small countries.
9I cannot analyze country-level foreign official positions because country-level U.S. data on the positions of foreign governments are not publicly available.
10It would also be interesting to express the loss in terms of scale factors other than GDP. Scaling by financial wealth would appear most appropriate, but I do not have access to such data across a wide range of countries. For other purposes, one could also scale by the size of the trade balance.
11Ireland has elements of a financial center (see Lane and Ruane, 2006).
12These are the holdings of the U.S. Personal Sector, defined as households, nonfarm, noncorporate business, and farm business (Source: U.S. Federal Reserve, Flow of Funds Table L.10). Some foreign securities are included in the figure, so this should be considered an upper bound estimate.
13The increase in U.S. foreign assets, and concomitant improvement in the U.S. net foreign asset position, has been analyzed by Tille (2003). For evidence on the co-movements of major international markets, see Goetzmann, Li, and Rouwenhorst (2005) and Brooks and del Negro (2004, 2006).
14A broader study of country exposure might include both assets and liabilities. In such a study, the $464 billion in dollar bonds that foreigners have sold to U.S. residents would reduce exposure in that it would reduce the value of a country’s liabilities.
15Recent work using the CPIS data include Lane (2006) and Lane and Milesi-Ferretti (2005).
16China’s and Taiwan Province of China’s positions were estimated as follows. At the end of 2004, according to ECB (2006) they had international reserves of $851.6 billion ($609.9 billion for China and $241.7 billion for Taiwan Province of China) and 66.0 percent of all countries’ reserves were in dollar assets. Assuming China and Taiwan Province of China had a similar currency composition, and that all of their dollar reserves were in debt securities (although some are likely in bank deposits), I added 0.660 × $851.6 billion, or $562.1 billion, to the value of emerging market’s reserves.
17The difference likely owes to the 6-month separation in the survey dates.
18This could owe to Ireland including foreigners’ sizeable positions through Irish unit trusts in their CPIS data, although presumably this would impact U.S. benchmark data as well.
19I calculate Japanese reserves as Japan’s holdings of U.S. bonds from Table 1 less its holdings of U.S. bonds from Table 6. I then, using proportions from the IMF’s reserves template, scale this up by 80 percent to get an estimate of developed countries’ reserves positions in U.S. securities. Emerging markets’ position are then calculated as a residual.
20Based on U.S. data (Table 1), I assume that 90.6 percent of foreigners’ positions in U.S. bonds are dollar denominated.

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