Contingent Advantage? Sovereign Borrowing, Democratic Institutions and Global Capital Cycles

Abstract

How do domestic and global factors shape governments’ capacity to issue debt in primary capital markets? Consistent with the ‘democratic advantage’, we identify domestic institutional mechanisms, including executive constraints and policy transparency, that facilitate debt issuance rather than electoral events. Most importantly, we argue that the democratic advantage is contingent: investors’ attention to domestic politics varies with conditions in global capital markets. When global financial liquidity is low, investors are risk-averse, and political risk constrains governments’ capacity to borrow. But when global markets are flush, investors are risk-tolerant and less sensitive to political risk. We support our argument with new data on 245,000 government bond issues in primary capital markets – the point at which governments’ costs of market access matter most – for 131 sovereign issuers (1990–2016). In doing so, we highlight the role of systemic factors, which are under-appreciated in much ‘open economy politics’ research, in determining access to capital markets.

Moving markets? Government bond investors and microeconomic policy changes

“…Similarly, investors reward countries with politically independent central banks in anticipation of greater monetary restraint (Bodea & Hicks, , ). Investors also favor democratic political institutions over autocratic ones; respect for the rule of law and audience costs in the wake of default confer a “democratic advantage” (Ballard‐Rosa et al, ; Beaulieu, Cox, & Saiegh, ). And investors take binding external commitments, such as preferential trade agreements and regional economic organization membership, as additional signals of commitment to macroeconomic restraint (Gray, , ; Tomashevskiy & Kono, ).…”

“…First, much of the literature linking sovereign debt outcomes with political events and institutions relies on annual, quarterly, and (occasionally) monthly data (e.g. Ballard‐Rosa et al, ; Brooks et al, ; Gray, ; Mosley, ), typically as the result of the periodicity of economic and political indicators. Yet, financial market reactions to changes in risk occur over a much shorter time frame in markets that are highly liquid.…”

“…Overall, our finding that sovereign debt markets do not react toward market (un)friendly reforms holds after incorporating inflation as a covariate (Table A13); considering event windows of various sizes: 5, 10, 21, and 30 days (Tables A14–A17); testing the effect of each day within a 15 days event window on CDS price movements to explore whether markets react on specific days (Table A18); and considering the most relevant single event per country‐year instead of multiple events per country‐year (Table A19) as we do in the analysis presented in Table . Additionally, in Tables A20 and A21, respectively, we incorporate an interaction term between the event windows and type of regime, and between the event windows and OECD membership to assess the possibility that democracies' and/or developed nations' advantages in international markets drive our results (Ballard‐Rosa et al, ; Mosley, ). Also, we examine whether financial markets have integrated the key distinctions between “liberal market economies” (LMEs) and “coordinated market economies” (CMEs).…”

“…Ours is not the first paper to argue that macroeconomic outcomes, rather than microeconomic policies, are of central interest to sovereign debt markets. These accounts (Ballard‐Rosa, Mosley, & Wellhausen, ; Brooks, Cunha, & Mosley, ; Mosley, ; Mosley & Singer, ), however, do not rely on daily trading data or offer a theoretical logic to explain why this should be the case. Indeed, Mosley () assumed that investors hold clear preferences over government policies—macroeconomic as well as microeconomic—but that investors sometimes ignore a subset of those policies, as part of their attempts to economize on the collection and evaluation of information.…”

Executive Constraint and Sovereign Debt: Quasi-Experimental Evidence From Argentina During the Baring Crisis

“…Second, several studies examine time series cross-sectional data on credit ratings received by 20th-century countries (Archer, Biglaiser, & DeRouen, 2007; Ballard-Rosa, Mosley, & Wellhausen 2016; Breen & McMenamin, 2013; DiGiuseppe & Shea, 2015). Here, an important complication in interpreting statistical results is that regimes with unconstrained executives (autocracies) were much less likely to be rated than those with constrained executives (mostly democracies; Beaulieu, Cox, & Saiegh, 2012).…”