The Economic Impact of Corruption Scandals in Latin America: Evidence from the Sovereign Bond Market

Abstract

We explore seven Latin American (LATAM) countries from 2011 to 2018 to assess whether corruption scandal events induce sovereign spreads reactions and consequently affect economic soundness. We focus on the direct and short-term reactions of sovereign spreads and investigate the medium-term impact of scandal events on economic soundness. We find that corruption scandal announcements instantaneously inflate sovereign spreads; the next-day impact is even stronger. Corruption scandals in one country are found to positively impact neighbouring countries (through sovereign yield deflation mechanisms) but induce lower FDI inflows and inverse contagion effects in the wider region. These results highlight the critical role played by scandals in the dynamics of borrowing costs faced by LATAM economies. The results may be employed by policymakers to forecast the consequences for their country's cost of debt and modify fiscal strategies accordingly.