Democracy's Spread: Elections and Sovereign Debt in Developing Countries

39 Pages Posted: 10 Jul 2003

See all articles by Paul M. Vaaler

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Steven Block

Tufts University - The Fletcher School of Law and Diplomacy

Burkhard N. Schrage

Singapore Management University

Date Written: June 2003

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

JEL Classification: D72, F30, F34, G12, G14, G15, G29

Suggested Citation

Vaaler, Paul M. and Block, Steven and Schrage, Burkhard N., Democracy's Spread: Elections and Sovereign Debt in Developing Countries (June 2003). William Davidson Institute Working Paper No. 575. Available at SSRN: https://ssrn.com/abstract=415420 or http://dx.doi.org/10.2139/ssrn.415420

Paul M. Vaaler (Contact Author)

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

Steven Block

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2717 (Phone)
617-627-3712 (Fax)

Burkhard N. Schrage

Singapore Management University ( email )

50 Stamford Rd
Singapore, 178899
Singapore
+65 6828 0755 (Phone)
+65 6828 0777 (Fax)

HOME PAGE: http://www.business.smu.edu.sg/Faculty/management/burkhad_schrage.asp

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