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The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries

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  • Block, Steven A.
  • Vaaler, Paul M.

Abstract

In developing countries, political business cycles may have implications not only for incumbent governments and their electorates but also for foreign actors involved in allocating credit and pricing it appropriately for investment. We examine this proposition with data on major credit rating agency sovereign risk ratings and market-determined credit spreads on bond yields for developing countries holding presidential elections in the 1980s and 1990s. We find that agency sovereign risk ratings decrease and bond spreads increase for developing countries during election periods. Both agencies and bondholders appear to view elections in developing countries negatively, and impose additional credit costs.
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  • Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
  • Handle: RePEc:eee:jimfin:v:23:y:2004:i:6:p:917-946
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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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