Government Choices Across Borrowing Strategies

• In Event: Political Economy of Sovereign Debt and International Finance

Abstract

We investigate how governments structure their borrowing portfolios: when taking on new debt, do governments seek to borrow from commercial banks, on the sovereign bond market, or from official creditors? We argue that, while some of the structure of government borrowing reflects macroeconomic conditions and country creditworthiness, governments' choices among borrowing instruments also are driven by their preferences over transparency. Those governments that are – typically for domestic political reasons – inclined not to make available information about the state of their economy and the state of their financial institutions will prefer, all else equal, to borrow from commercial banks (versus to issue bonds), or to borrow from official bilateral creditors (rather than multilateral). Borrowing from these entities imposes fewer disclosure requirements, and disclosures are made to a narrower audience. We test our hypotheses using data on the composition of government debt over time, for a large set of developing countries. We find evidence that transparency correlates with the choice of disintermediated (vs. intermediated) credit.

Authors

• Eric Arias, College of William & Mary

• Layna Mosley, University of North Carolina, Chapel Hill

• B. Peter Rosendorff, New York University