Journal
BRITISH JOURNAL OF POLITICAL SCIENCE
Volume 51, Issue 1, Pages 353-373Publisher
CAMBRIDGE UNIV PRESS
DOI: 10.1017/S0007123418000455
Keywords
capital markets; government debt; bond issues; democratic advantage; political risk
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This study examines how domestic and global factors shape governments' ability to issue debt in primary capital markets, emphasizing that the democratic advantage is contingent on conditions in global capital markets. It is noted that when global financial liquidity is low, investors tend to be risk-averse, whereas when global markets are flush, investors are more tolerant of risk.
How do domestic and global factors shape governments' capacity to issue debt in primary capital markets? Consistent with the 'democratic advantage', we identify domestic institutional mechanisms, including executive constraints and policy transparency, that facilitate debt issuance rather than electoral events. Most importantly, we argue that the democratic advantage is contingent: investors' attention to domestic politics varies with conditions in global capital markets. When global financial liquidity is low, investors are risk-averse, and political risk constrains governments' capacity to borrow. But when global markets are flush, investors are risk-tolerant and less sensitive to political risk. We support our argument with new data on 245,000 government bond issues in primary capital markets - the point at which governments' costs of market access matter most - for 131 sovereign issuers (1990-2016). In doing so, we highlight the role of systemic factors, which are under-appreciated in much 'open economy politics' research, in determining access to capital markets.
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