DEMOCRACY’S SPREAD: Elections and Sovereign Debt in Developing Countries

Steven Block, Burkhard N. Schrage () and Paul Vaaler ()

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: We use partisan and opportunistic political business cycle (“PBC”) considerations to develop and test a framework for explaining election-period changes in credit spreads for developing country sovereign bonds. Pre-election bond spread trends are significantly linked both to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Bond spreads for right-wing (leftwing) incumbents increase (decrease) as the likelihood of left-wing (right-wing) challenger victory increases. For right-wing incumbent partisan and opportunistic PBC effects bondholder risk perceptions are mutually reinforcing. For left-wing incumbents partisan PBC effects dominate bondholder risk perceptions compared to opportunistic PBC effects.

Keywords: economics; elections; developing countries; sovereign bonds; spreads (search for similar items in EconPapers)
JEL-codes: D72 F30 F34 G12 G14 G15 G29 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2003-05-15
New Economics Papers: this item is included in nep-pol
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