Yet despite their attraction, no more than a handful of countries internationally have so far issued GDP-linked debt instruments. Contingent convertible (“CoCo”) bonds are a second, potentially useful, debt instrument. These have been popular recently among banks. For countries, they could be designed with a duration which is automatically extended if a country breaches certain pre-set stress conditions – for example, if it is the subject of an IMF lending programme (Brooke et al (2012)). This would then deliver some automatic alleviation of short-term liquidity pressures. So far, no country has issued such instruments. There has been somewhat greater progress towards the inclusion of contractual clauses which assist in the restructuring of sovereign debts once these become unsustainable. In particular, following the Asian crisis there was a push by the international community to include Collective Action Clauses (CACs) in international bond contracts. Yet as recent Argentine experience illustrates, this has not closed the book on sovereign debt restructuring problems. Existing CACs tend only to cover one particular class of bonds. This gives rise to a potential aggregation problem if other classes of bond vote against – or hold-out from – a restructuring agreement. “Aggregation” CACs include the option for bonds to be restructured on the basis of a single vote across all affected bonds. A recent IMF paper proposed that these clauses be included in foreign law bonds, a proposal which appears to have the support of the international community (IMF (2014)). Kazakhstan recently incorporated these clauses into its bond programme.

Chart 5 plots a measure of global capital market integration (external assets/GDP) against a measure of the incidence of crises – all crises and banking crises (Reinhart and Rogoff (2011)). Integration appears to have been associated with an increase in the incidence of crisis over the past couple of decades, perhaps especially banking crises. It is not just the incidence, but also the prospective size of crises and their spill-over consequences that has increased. Chart 6 provides one perspective on that. It looks at the scale of IMF programmes over time, normalised by the borrowing country’s quota. Two features are striking: first, the increased incidence of programmes; but second, more dramatically, their increased scale. Academic evidence has long pointed towards important spillover effects from national or international disturbances (Obstfeld and Rogoff (1995), Forbes and Warnock (2012) and Fratzscher (2012)). But recent evidence points towards more potent contagion channels. For example, Rey (2013) finds evidence that a common global risk factor drives asset prices and cross-border capital flows, for both advanced and emerging economies. It is worth putting under the microscope these shifting patterns in global financial market correlations, especially over the most recent period. Charts 7–9 plot correlations between long-term bond yields, equity prices and investment grade corporate bond spreads respectively in the US, UK and the euro-area over the past few decades. Two features stand out. First, there has been a steady rise in the degree of co-movement in asset prices over time. Take government bond yields over the past 50 years.