The outline of the paper is as follows: First, the paper examines the growth of government domestic debt over the period 1990-2004 using a new data set.<sup>4</sup> The data set covers 25 large banking systems in the developing countries.<sup>5</sup> The paper also compares the growth of government domestic debt to government foreign debt in this period.

The analysis is based on the definition of government debt as central government debt (including government debt to the central bank) and central bank securities and other non-reserve liabilities to banks, a type of debt neglected in previous studies. Government debt is in turn divided into liabilities issued in domestic markets and liabilities issued internationally.<sup>6</sup> Domestic debt includes marketable and non-marketable securities and similar government obligations, but not capital in public institutions, nor guarantees. International debt includes liabilities to the IMF, the international financial institutions, and public and publicly guaranteed bank loans and market debt. Short-term foreign debt is not included because of the lack of comparable data.<sup>7</sup> The paper then argues that the growth of government domestic debt broadly reflects the interaction of three supply factors and one demand factor. The supply factors are: the bond issues associated with the financial crises of the 1990s, the growth of central bank debt, and the increased attractiveness of borrowing domestically to the issuing governments. The demand factor is the growth of new sources of demand for government domestic debt. Domestically, new sources of demand include pension and investment funds. Internationally, non-residents have become more interested in 4 The data differs from the studies listed in footnote 1, in terms of the countries studied, the use of publicly available data sources rather than questionnaires to governments, and the inclusion of central bank debt. 5 The countries are listed in Table 1. In 2000, the 25 countries’ banking systems accounted for 89 percent of banking system deposits in developing countries; the countries also have relatively large equity markets and are open to capital flows (See Hanson, Honohan, and Majnoni, 2003). Seventeen of the countries are outside Latin America and the Caribbean, an area that has drawn much of the recent focus on government debt, e.g., Borensztein, et al, 2006. In addition, the paper sometimes mentions Costa Rica and Jamaica, two smaller countries with debt histories that illustrate some of the major issues, and South Africa, which has a large banking system, but is atypical because it was excluded from external borrowing until the early 1990s. Lebanon, a country with a large banking system is excluded because of the importance of offshore deposits. The data are drawn from the IMF’s _International Financial Statistics_ , the World Bank’s _Global Development Finance_ , national sources, academic articles, and Cowan, et al, 2006. The data set is available from the author.

6 The data and the analysis of this paper do not distinguish between the currencies of the issues, which would be another paper in itself. Some governments have issued domestic debt in foreign currency and, recently, a few countries have issued foreign debt in their own currency. As discussed below, there are advantages and disadvantages in issuing debt in foreign currency.

7 Obviously the domestic and foreign debt figures are not strictly comparable. An important issue in comparisons is the conversion of government debt, including domestic debt, into a single currency, which depends substantially on the exchange rate used. Substantial variations in the exchange rate lead to substantial variations in the ratio of debt to GDP, independent of borrowing and repayment. Second, the foreign debt figure understates foreign debt by including only medium- and long-term debt. Third, the foreign debt figure includes publicly guaranteed debt and well as government debt; the domestic debt figures do not. This tends to reduce the estimated importance of government domestic debt relative to foreign debt. However, this issue is mitigated by the increased government limitations on public enterprises’ borrowing and the privatizations since 1990. Finally, there may be differences in the valuations of government debt between the government and the holders of its debt, both because of marking to market and differences in the recognition of obligations.

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