Constraining Creditors: How Governments Generate Demand for their Own Debt

• In Event: The Politics of Financial Markets

Abstract

The literature has highlighted the political constraints posed by financialization: mobile financial assets should be harder to tax, as asset owners may easily reallocate their assets to low-tax investments or jurisdictions. Governments nevertheless require revenue to respond to their constituents and to remain in power. When the costs to raising revenue increase, governments must find ways to generate demand for their debt. We present data documenting a new set of policies, borrowing privileges, which include mandates that institutional investors and collective investment funds hold their assets in government bonds. Borrowing privileges are unpopular with financial actors, as they may force investors to hold assets with lower returns and prevent portfolio diversification. We show that governments implement borrowing privileges to shore up demand for their debt when their borrowing costs are high. These privileges are less common when financial actors are more influential, for example when the banking sector is concentrated. Most generally, the analysis shows that the government retains the ability to regulate even mobile assets, at the nexus between the financial service provider and its predominantly immobile customers.

Authors

• Timm Betz, Texas A&M University

• Amy Pond, Texas A&M University