Journal Issue

Research: Putting Too many Eggs in one Basket?

International Monetary Fund. External Relations Dept.
Published Date:
November 2006
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The widening U.S. current account deficit and the associated large positions that foreigners are amassing in U.S. bonds and equities—roughly $5 billion—have garnered much attention from academics, policymakers, practitioners, and the financial press. There are many structural reasons for this accumulation. For portfolio equity investors, few countries protect the rights of outside investors more vigorously. For fixed-income investors, U.S. bond markets offer unparalleled depth and liquidity. But these large positions also leave foreigners exposed to fluctuations in U.S. asset prices. In an IMF Working Paper, Francis E. Warnock addresses this aspect of foreigners’ U.S. positions by assessing how a rapid decline in U.S. financial market prices could impact foreigners across a wide range of countries.

He traces out the composition of exposure to U.S. securities markets and investigates its potential implications by studying the effect on wealth (in dollar terms and as a share of investor-country GDP) of an unexpected 10 percent decrease in U.S. bond and equity prices as well as in the value of the dollar against other currencies.

Potential losses

Taking into account the currency composition of foreigners’ U.S. holdings, Warnock finds 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—or roughly $1.2 trillion in foreign currency terms of financial wealth.

Narrow focus

Warnock used two datasets for the study. The first measures foreign holdings of U.S. securities as reported in the June 2004 comprehensive U.S. benchmark liabilities survey. The second data source is the IMF’s December 2004 Coordinated Portfolio Investment Survey (CPIS), which Warnock uses to compute implied U.S. liabilities (the amount of U.S. securities residents of each country are reported to own). He notes more than a few caveats to his analysis. The study focuses very narrowly on the first-order effects of the dollar exposure of portfolio assets on foreign wealth, while the particular scenario Warnock uses may or may not be realistic. Some may see the projected consequences of a disorderly unwinding of global imbalances as too conservative, whereas others may believe a simultaneous decline in the dollar and U.S. stock and bond markets to be improbable.

Big exposure

Foreign positions in U.S. long-term securities have increased sharply in recent years.


(million dollars, June 2004)
Developed countries3,443,5531,416,1562,027,397
Euro area1,367,630526,284841,346
Other Europe826,685465,506361,179
United Kingdom471,348249,945221,403
Other developed1,249,238424,366824,872
Emerging markets1,612,565447,2011,165,364
Latin America87,92220,31167,611
Emerging Asia566,03815,806550,232
Financial centers807,427333,778473,649
Caribbean financial centers1627,740239,743387,997
Emerging Europe29,76695228,814
Other emerging121,41276,35445,058
of which: Reserves1,320,000134,0001,186,000

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

Data: Author’s calculations.

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

Data: Author’s calculations.

That said, Warnock finds that the exposure to U.S. security markets of almost every developed country has increased over the past decade. Taking Canada as an example, he shows that 10 percent declines in the dollar and in 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, such as China, is similar.

This article is based on IMF Working Paper No. 06/170, “How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?” by Francis E. Warnock. Copies are available for $15.00 each from IMF Publication Services. Please see page 340 for ordering details. The full text is also available on the IMF’s website (

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