How Governments Shape Peer Networks in Sovereign Bond Markets

• In Event: The International Political Economy of Money and Credit

Abstract

Governments around the world issue sovereign bonds as a means of financing their activities beyond the limits of current revenue. The price and availability of such debt instruments is determined heavily by a sovereign borrower’s perceived risk. While creditworthiness – the ability and willingness to pay – is a central component of sovereign risk, recent research suggests that the categorization, or peer grouping of governments also affect how investors assess risk. We therefore suggest that, rather than being passive recipients of financial market evaluations, governments can attempt to manipulate their peer categorization. Our paper investigates the ways in which governments strategically position themselves within different peer groups. Governments usually delegate the issuance and marketing of debt to their debt management offices (DMOs). These agencies engage with investors on behalf of governments to structure the country’s borrowing profile and mediate the government’s relationship with private capital markets. They do so primarily through investor presentations (“road shows”) both at home and abroad. Such activities of DMOs are an important, but under-appreciated element in financial market-government relations. Yet it is where we expect to find an important and strategic role for governments in relations with market actors. Specifically, we expect that when presenting information about their country to potential investors, DMOs attempt to situ- ate their country relative to other countries in a way that will shape investors’ perceptions of risk in favor of the country. We anticipate that some governments will compare themselves to higher-status countries to signal their membership with aspirational peers: for instance, countries that want to improve perceptions of creditworthiness may compare their economic performance to higher status (in terms of sovereign risk) peers. In other situations, DMOs may seek to project status by comparing their government to other, weaker (higher risk) countries in the region. We test our expectations empirically via network analyses based on DMOs’ investor presentations. This allows us to determine how and to what extent states compare themselves within and across regions, credit rating, by GDP, and identify the endogenous attributes of the presentation network. Through this, we precisely quantify under what conditions DMOs favorably compare themselves to their economic peers versus anchoring their economic standing against wealthier states.

Authors

• Jared Falkenberg Edgerton, Ohio State University

• Sarah M. Brooks, Ohio State University

• Layna Mosley, Princeton University