The Impact of Transparency on the Cost of Sovereign Debt in Times of Economic Crisis

Abstract

This paper analyses which factors determine the cost of debt, specifically in the light of the deep economic crisis the world is facing today. We evaluate the impact of transparency, financial indicators and sovereign ratings on public debt interest. We consider several measures related to transparency: transparency index, corruption index and public trust in politicians’ financial honesty index. We work with 2008 (the beginning of the economic crisis) and 2012 data for OECD and BRICS countries. Our results show that all measures connected with fiscal transparency negatively impact the cost of sovereign debt, increasing therefore the financing costs of the government in 2008. A comparison of 2008 with 2012 reveals a substitution effect. On the one hand, transparency, corruption and public trust indexes explain interest rates in the first year considered. On the other, in 2012, when the crisis started to be overcome, the fiscal situation, rather than transparency indexes, explains interest rates. In the whole time window, sovereign rating holds its explanatory power.

The Determinants of Green Bond Issuance in the European Union

“…With respect to the sovereign rating, similar to Barua and Chiesa (2019), Benito et al (2016), andBastida et al (2017), we find a positive and significant impact on green bond issues. Investors rely on a rating that is an evaluation tool that presents the issuer's risk of default.…”

“…Also, Li et al (2020) and Sheng et al (2021) find that rating influence the spreads and yields of green bonds. Low ratings are associated with higher financing costs since it presents the issuer's ability to repay their debt and access capital market (Benito et al 2016;Bastida et al 2017;Wang et al 2019). We used the sovereign rating provided by S&P, Moody's, or Fitch (according to rating availability) and transformed it into numerical variables of 1 (CCC) to 17 (AAA) following Capelle-Blancard et al (2019).…”

A Private Sector Failure, a Public Sector Crisis – Reflections on the Great Recession

“…Benito et al. () compare factors that influence the cost of sovereign debt of 18 countries in 2008 and 2012. Their results suggest that financial agents concentrate on economic indicators, rather than wider factors of accountability and transparency, in more recent, challenging times.…”

“…She finds ambiguity in governance arrangements resulting in a 'delegated finance problem' to ALBs, whose responses include not engaging in projects because the burden of time and effort needed to gain approval to incur necessary expenditure is too great. Benito et al (2016) compare factors that influence the cost of sovereign debt of 18 countries in 2008 and 2012. Their results suggest that financial agents concentrate on economic indicators, rather than wider factors of accountability and transparency, in more recent, challenging times.…”

The Impact of Debt Financing on Economic Growth

“…Thus, the governments use the debt, as a tool of the intergenerational solidarity, due to the financing and the realization of the investments allowing the development of the infrastructures and the setting up of the suitable conditions to the economy and the population [1]. Benito et all evaluated the impact of transparency, financial indicators and sovereign ratings on public debt interest [2].…”