Coming to Terms: The Politics of Sovereign Bond Denomination Cameron Ballard-Rosa, UNC Chapel Hill Layna Mosley, UNC Chapel Hill Rachel Wellhausen, UT Austin

Motivation How do governments access sovereign bond markets? Outcomes matter for borrowing costs, as well as for future policy. Especially in times of crisis, terms of borrowing affect governments’ room for maneuver. Primary markets: best location to observe strategic choices regarding sovereign borrowing. BMW1: effect of political institutions & global capital market conditions on borrowing (access as well as amount) This paper: terms on which governments borrow. Motivation: governments aren’t price takers

“Original sin?”

Theory Governments have preferences regarding not only when and how much to borrow, but also how: Currency denomination Debt maturity Yield (interest rate) Governments may be willing to trade off across debt terms strategically. Government ideology matters Leftwing government prefer issuing in domestic currency Rightwing governments prefer issuing in foreign currency

Our sample Issue level data, for (nearly) all sovereign issuers, 1990-2016 237,916 bonds total Maturity > 1 year: 98,659 bonds 97 non-OECD countries With baseline controls, we have ~8,000 observations across 97 countries With full controls, we have ~6,500 observations across 77 countries With inclusion of government ideology, we have ~4,000 observations across 54 countries.

Our data First check: is currency driven by “macroeconomic creditworthiness”? DV: Issuance in foreign currency (% total value) by country-month Model controls: Baseline: GDPpc, change GDP, Current account, KAOpen, External debt, UST 10yr Full: Trade, CBI, Regime duration, Pegged XR, Oil rents, IMF prog., Inflation crisis, Debt crisis Main finding: Inflation crisis associated with significantly more foreign issuance More debt (and debt crises) associated with less foreign issuance

Partisanship by decade

Currency composition and government ideology

Tradeoffs across terms: Additional analyses Longer maturity associated with more foreign issuance True with or without control for ideology Higher yields associated with more domestic issuance But this effect is not as pronounced when maturity is also included

Robustness Results hold with linear, quadratic, or cubic time trend; as well as when we split the sample by time. Also hold with year fixed effects Find similar results using OLS or Heckman selection mode Robust to additional controls: credit rating, FDI inflows, MSCI category No effect found in the non-democratic subsample

Debt Management Offices (DMOs) Have begun original data collection effort to code DMO features We focus on 3 characteristics: DMO location (Central Bank, Ministry of Finance, Autonomous) Whether DMO has sole authority to manage government debt Whether other government agencies can issue debt In our data: 42% of observations have no data (yet!) for DMO. 6.5% locate DMO in CB 42% located DMO in Min. Fin. 10% located autonomously Among those with DMOs, autonomous DMOs issue significantly more in domestic currency Consistent with a “professionalization” story

Future research Tradeoffs across terms Use IRT model to capture latent “cost” dimension across currency vs maturity vs yield Can generate at the issue level (~240,000 issues in dataset) Further incorporate political dynamics surrounding DMOs Complement vs substitute for CBI? Fix XR? Partisan preferences for DMO autonomy?

Extras

Amount issued by partisanship