Financial Data Transparency, International Institutions, and Sovereign Borrowing Costs

Abstract

Conditionally Accepted for publication in International Studies Quarterly What explains variation in sovereign borrowing costs, and what role does information about the state of a country's financial sector play in the determination of those costs? Investors charge more interest when there are higher default risks. When estimating default risks, investors consider more than explicit public debt levels and include the risk that the financial sector poses to sovereigns in their calculations. Investors are more confident of their assessments when regulators release credible data on the shape and health of their financial sectors. Investors reward more transparent governments with lower sovereign borrowing costs. At the same time, we predict that the e↵ectiveness of transparency declines as public debt increases. Testing this argument requires a measure of transparency, so we create a new Financial Data Transparency (FDT) Index. The Index measures governments' willingness to release credible financial system data. Using the FDT and a sample of high-income OECD countries, we find that such transparency reduces sovereign borrowing costs. The e↵ects are conditional on the level of public indebtedness. Transparent countries with low debt have lower and less volatile borrowing costs.

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

“…So-called ‘liberal’ democracies are characterized by strong respect for the rule of law and judicial independence; these limits on arbitrary government action further enhance investors’ confidence that governments will honor contracts (Biglaiser and Staats 2012; Cordes 2012). Additionally, because democracies tend to be more transparent in their release of economic and financial information, as well as policymaking processes, investors may be more confident in their ability to price risk (Campello 2015; Copelovitch, Gandrud, and Hallerberg 2018; Devlin 1989; Hollyer, Rosendorff, and Vreeland 2011). Several empirical studies establish that, via these reinforcing mechanisms, democracy leads to lower risk premiums on outstanding (secondary market) debt, lower prices for insurance against default (credit default swaps) and higher sovereign credit ratings (Beaulieu, Cox, and Saiegh 2012; DiGiuseppe and Shea 2016; North and Weingast 1989; Saiegh 2005).…”

The Corporate Governance of Public Banks before and after the Global Financial Crisis

“…Market actors continue to worry about the propensity of public banks to get in trouble and to threaten to increase the public debt burden. For example, credit rating agencies, such as Standard and Poor's, consider public ownership of much of the banking sector in some countries as a clear credit risk (Copelovitch et al., ). At the same time, less internationalized municipality‐owned Sparkassen (savings banks), important creditors for small and medium‐sized enterprises and for individuals in Germany, emerged unscathed from the financial crisis and were considered as possibly a risk‐free banking model (Deeg and Donnelly, ).…”

Transparency and currency crises

“…Releasing data to international organizations such as the IMF and World Bank is particularly useful for investors since they make the data more accessible to investors and more comparable across countries (Copelovitch, Gandrud, & Hallerberg, 2018). Releasing data to international organizations such as the IMF and World Bank is particularly useful for investors since they make the data more accessible to investors and more comparable across countries (Copelovitch, Gandrud, & Hallerberg, 2018).…”

“…In sum, both variables measure governments' collection and dissemination of aggregate data through international institutions. Releasing data to international organizations such as the IMF and World Bank is particularly useful for investors since they make the data more accessible to investors and more comparable across countries (Copelovitch, Gandrud, & Hallerberg, 2018). To the extent to which the amount of information governments publicly release decreases the amount of noise in investors' private information about the state of economic fundamentals, I expect both of them to be correlated with a reduced risk of currency crisis.…”