Fiscal transparency and the cost of sovereign debt
| Date | 01 March 2017 |
| Published date | 01 March 2017 |
| Author | María-Dolores Guillamón,Bernardino Benito,Francisco Bastida |
| DOI | 10.1177/0020852315574999 |
| Subject Matter | Articles |
International Review of
Administrative Sciences
2017, Vol. 83(1) 106–128
!The Author(s) 2015
Reprints and permissions:
sagepub.co.uk/journalsPermissions.nav
DOI: 10.1177/0020852315574999
journals.sagepub.com/home/ras
International
Review of
Administrative
Sciences
Article
Fiscal transparency and the cost of
sovereign debt
Francisco Bastida
University of Murcia, Spain
Marı
´a-Dolores Guillamo
´n
University of Murcia, Spain
Bernardino Benito
University of Murcia, Spain
Abstract
This article analyses the factors that seem to play an important role in determining the
cost of sovereign debt. Specifically, we evaluate to what extent transparency, the level of
corruption, citizens’ trust in politicians and credit ratings affect interest rates. For that
purpose, we create a transparency index matching the 2007 Organisation for Economic
Co-operation and Development/World Bank Budgeting Database items with the
Organisation for Economic Co-operation and Development Best Practices for Budget
Transparency sections. We also check our assumptions with the International Budget
Partnership’s Open Budget Index and with a non-linear transformation of our index.
Furthermore, we use several control variables for a sample of 103 countries in the year
2008. Our results show that better fiscal transparency, political trust and credit ratings
are connected with a lower cost of sovereign debt. Finally, as expected, higher corrup-
tion, budget deficits, current account deficits and unemployment make sovereign
interest rates increase.
Points for practitioners
The key implications for professionals working in public management and administration
are twofold. First, despite the criticism raised by credit ratings, it is clear that poorer
ratings are connected with higher financing costs for governments. Therefore, govern-
ments should enhance those indicators that impact the credit rating of their sovereign
debt. Second, governments should seek to be more transparent, since transparency
reduces uncertainty about the degree of cheating, improves decision-making and there-
fore decreases the cost of debt. Transparency reduces information asymmetries
Corresponding author:
Bernardino Benito, Department of Accounting and Finance, Faculty of Economics and Business, Regional
Campus of International Excellence ‘Campus Mare Nostrum’, University of Murcia, 30100, Spain.
Email: benitobl@um.es
between governments and financial markets, which, in turn, diminishes the spread
requested by investors.
Keywords
central administration, public finance, transparency, trust
Introduction
Over the past two decades, an increasing number of countries have gone to financial
markets to fund their deficits. This trend has prompted these countries to enhance
the transparency of their financial situation. Indeed, they are required to provide
rating agencies, underwriters and security market supervisory agencies with consid-
erable data on their debt stock (Kopits and Craig, 1998). Despite many countries
having enacted legislation to increase their financial transparency, it is evident that
some countries still try to conceal information (Pasquier and Villeneuve, 2007).
Sovereign credit ratings assess governments’ ability to repay their debt. Thus,
countries with a better credit rating are more likely to convince the markets about
their ability to meet their financial commitments. Butler and Fauver (2006) show
that, among other factors, sovereign ratings take into account transparency.
Accordingly, sovereign credit ratings are considered as a good proxy for the
degree of transparency and future country risk (Kim and Wu, 2008).
On the other hand, fiscal transparency leads to increased credibility, which, in
turn, helps reduce risk premiums in financial markets (Kopits and Craig, 1998).
Following Heald (2003), when governments enhance fiscal transparency, a lower
cost of capital can be expected, as their credit rating improves.
Within this background, this article analyses the factors that seem to play an
important role in determining the cost of debt. Specifically, we examine the impact
of transparency, the level of corruption, citizens’ trust in politicians and credit
ratings. For that purpose, we run OLS on data collected from several international
data sets (Moody’s, IDEA, World Bank, PARLINE, IBP, Heritage Foundation
and WEFORUM) for a sample of 103 countries in 2008.
We think that the interest of this article is twofold. On the one hand, the oppor-
tunity to revisit the theme of world interest rates is particularly welcomed because it
has been over a decade since the last extensive discussion of the ‘world interest rate’
and its determinants (Chinn and Frankel, 2004). In fact, policy debates on the
regulation of capital markets would be well served by an enhanced understanding
of the link between transparency and yields (Liu and Thakor, 1984). On the other,
the relevance of the interest rate to financial policy is evident since the cost of debt
influences the level of indebtedness (Ashworth et al., 2005). This is especially out-
standing at present because of the financial problems derived from the current
world financial crisis.
Finally, we would like to emphasize the novelty of this article and of its
methodological approach compared to other similar works. Apart from updating
Bastida et al. 107
To continue reading
Request your trial