Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum...

40
Annals of the University of North Carolina Wilmington International Masters of Business Administration http://csb.uncw.edu/imba/

Transcript of Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum...

Page 1: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

Annals of the

University of North Carolina Wilmington

International Masters of Business Administration

http://csb.uncw.edu/imba/

Page 2: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

SOVEREIGN DEBT SPREADS AND ELECTORAL SYSTEMS

Luis Pastor Graells

A Thesis Submitted to the

University of North Carolina Wilmington in Partial Fulfillment

of the Requirements for the Degree of

Master of Business Administration

Cameron School of Business

University of North Carolina Wilmington

2014

Approved by

Advisory Committee

Edward Graham Peter Schuhmann

Nivine Richie

Chair

Accepted by

Dean, Graduate School

Page 3: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

ii

TABLE OF CONTENTS

ABSTRACT ............................................................................................................................. iii

LIST OF TABLES .................................................................................................................... iv

LIST OF FIGURES ....................................................................................................................v

LIST OF APPENDICES ........................................................................................................... vi

1. INTRODUCTION...................................................................................................................1

2. LITERATURE REVIEW ........................................................................................................3

2.1 Sovereign Debt Spreads.........................................................................................................3

2.2 Institutional and Political Factors...........................................................................................6

3. HYPOTHESES ..................................................................................................................... 10

4. DATA AND METHODOLOGY ........................................................................................... 13

4.1 Data .................................................................................................................................... 13

4.2 Methodology ....................................................................................................................... 16

5. RESULTS ............................................................................................................................. 20

6. DISCUSSION AND CONCLUSIONS .................................................................................. 24

REFERENCES ......................................................................................................................... 26

APPENDICES .......................................................................................................................... 29

Page 4: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

iii

ABSTRACT

The primary focus of this article is to investigate the effects of electoral systems on sovereign

debt spreads. Moreover, the impact of other political factors, such as the government and

parliament composition, the share of the government in parliament and the government ideology,

is also analyzed. I use cross-national data from 39 democratic countries between 1981 and 2011.

Findings show that majoritarian electoral systems, contrary to proportional electoral systems,

reduce spreads. This is consistent with the correlation between electoral rules and economic

policy. Previous studies demonstrate that proportional electoral rules tend to be associated with

left-wing governments that implement more redistributive policies than right-wing governments,

instead of giving priority to the payment of its sovereign debt obligations. The results support the

importance of the institutional environment in determining sovereign debt spreads and overall

find five factors that lower sovereign debt spreads: majoritarian electoral systems, the existence

of a government coalition, fewer parties in parliament, a government majority in parliament and

the existence of a right-wing government.

Page 5: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

iv

LIST OF TABLES

Table Page

1. Descriptive Statistics for the Country-Year ............................................................................ 14

2. Electoral Systems and Government Ideology ......................................................................... 15

3. Regression Results of Sovereign Debt Spreads ...................................................................... 22

Page 6: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

v

LIST OF FIGURES

Figure Page

1. Electoral Systems .................................................................................................................. 15

2. Government Ideologies ......................................................................................................... 15

Page 7: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

vi

LIST OF APPENDICES

Appendix Page

A. List of countries in the Sample ............................................................................................. 29

B. Sample Averages by Country ................................................................................................ 30

C. Correlation Matrix ................................................................................................................ 32

D. Electoral Systems Glossary .................................................................................................. 33

Page 8: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

1. INTRODUCTION

The difference in interest rates that countries pay for their sovereign debt has been broadly

analyzed in many studies. On one hand, evidence suggests that macroeconomic forces drive

sovereign debt spreads and that greater government deficits and public debt are associated with

higher long-term interest rates and low global growth prospects (Elmendorf and Mankiew, 1998;

Baldacci and Kumar, 2010). On the other hand, an important part of the literature investigates the

influence of political and institutional factors on sovereign debt spreads. These factors include

the form of government, the quality of legal and political institutions, political stability, levels of

government intervention in the economy, and degree of fiscal consolidation (Butler and Fauver,

2006; Van Rijckeghem and Weder, 2009; Kohlscheen, 2010; Baldacci, Gupta, and Mati, 2011).

Iversen and Soskice (2006) find that proportional electoral systems are associated with center-

left governments and majoritarian electoral systems to center-right governments, and that left-

wing governments implement more redistributive policies than right-wing governments,

suggesting a direct relationship between the electoral system and the economic policy. The

electoral system is an important part of the political and institutional structure. Nevertheless,

there is a notable gap in the literature regarding how it affects sovereign debt spreads.

In this paper I investigate the effects of electoral systems on sovereign debt spreads.

Additionally, I analyze the impact of other political factors, such as the government and

parliament composition, the share of the government in parliament, and the government

ideology.

I use 676 observations from 39 democratic countries between 1981 and 2011. Findings show

that countries with majoritarian electoral systems have lower sovereign debt spreads than

countries with proportional electoral systems. Four other political factors are found to be

Page 9: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

2

associated with lower sovereign debt spreads: the existence of a government coalition, fewer

parties in parliament, a government majority in parliament and the existence of a right-wing

government.

The remainder of this article is organized as follows: Section 2 reviews prior literature,

Section 3 presents the hypotheses, Section 4 describes data and methodology, Section 5 presents

the results and Section 6 concludes.

Page 10: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

2. LITERATURE REVIEW

This study is closely related to the literature that investigates sovereign debt spreads. This

section has two parts. The first one summarizes the literature about the problem of high debt and

the determinants of sovereign debt spreads. The second part summarizes the literature that relates

institutional and political factors with sovereign debt spreads.

2.1 Sovereign Debt Spreads

According to the standard neoclassical model, fiscal deficits reduce national savings and

increase aggregate demand, leading to higher interest rates (Elmendorf and Mankiw, 1998).

Blanchard (2003) explains that as debt increases, countries pay more interest for their sovereign

debt. Later, if countries cannot obtain surpluses by increasing taxes or reducing spending,

countries will increase their debt again and pay even higher interest rates. This could result in a

vicious circle in which public debt continues to increase, and at some point the government

decides that the best option is to default.

In contrast, the Ricardian equivalence proposition, also known as the Barro-Ricardo

equivalence theorem, holds that private savings increase one for one with deficits in anticipation

of futures taxes, leaving total savings unchanged (Mankiw, 2003). This theory contradicts the

mainstream theories provided by Keynesian economists. The Ricardian equivalence has been

criticized, by Buchanan (1976) and Feldstein (1976) among others.

Sovereign debt interest rates have an important impact on the overall economy. Baldacci and

Kumar (2010) confirm that higher deficits and public debt lead to a significant increase in long-

term interest rates, with the precise magnitude dependent on initial cross-country specific factors.

The impact of higher deficits on interest rates is greater when there are weak initial fiscal

Page 11: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

4

conditions, weak or inadequate institutions, structural factors (such as low domestic savings), or

limited access to global capital.

There is extensive literature that studies the determinants of sovereign bond interest rates and

country risk premiums. Haugh, Ollivaud, and Turner (2009) analyze yield spreads for sovereign

bonds between Germany and other Eurozone countries. They decompose interest rates into the

risk free rate and the country risk premium. The country risk premium is the sum of the credit

default risk and the liquidity risk.

Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors

increase default risk of sovereign bonds, and risk premiums are better explained by credit default

risk than by liquidity risk in the eurozone. Guscina (2008) identifies three different types of

factors affecting the structure of government debt in emerging countries: macroeconomic,

political, and institutional. Countries with unstable macroeconomic and political environment

and bad quality institutions will not develop a domestic debt market. Furthermore, many studies

point out global risk aversion as another important factor. Caceres, Guzzo, and Segoviano (2010)

find that earlier in the last financial crisis, global risk aversion was the most significant factor

influencing sovereign spreads, but later county-specific factors gained importance. Hilscher and

Nosbusch (2010) also find global factors to be significant and find the VIX index to be

significant and positively correlated with sovereign spreads. Pan and Singleton (2008) use the

VIX index achieving the same results. The volatility of terms of trade is also a significant

variable affecting sovereign spreads according to Hilscher and Nosbusch (2010).

Sovereign credit risk is studied from a different perspective by Longstaff, Pan, Pedersen, and

Singleton (2011). They estimate sovereign spreads using sovereign credit default swap (CDS)

contracts on external debt and also find sovereign spreads to be driven by global factors. They

Page 12: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

5

find a positive correlation between sovereign spreads and the volatility risk premium embedded

in the VIX index.

More studies support the idea that global macroeconomic forces are an important determinant

of sovereign credit spreads. Uhrig-Homburg (2013) finds higher credit spreads in global

recessions and when there are low global growth prospects. Edwards (1984), Min (1998), and

Westphalen (2001) examine macroeconomic variables to determine which ones best explain

sovereign spreads. Min (1998) finds liquidity and solvency variables to be significant. These are

the debt-to-GDP ratio, the international reserves-to-GDP ratio, the debt service ratio, and export

and import growth rates. The macroeconomic fundamentals variables found to be significant are

the domestic inflation rate, net foreign assets as measured by the cumulative current account, the

terms of trade, and real exchange rate.

Past repayment history is also an important factor influencing the premium risk. Reinhart,

Rogoff, and Savastano (2003) explain external debt intolerance may be a function of a country’s

repayment history, debt levels, and history of macroeconomic stability. A country that has

previously defaulted has more possibilities to default again on its external debt.

Overall, these studies provide different factors that may affect sovereign debt spreads. On the

one hand, spreads are influenced by macroeconomic factors, such as initial fiscal conditions,

liquidity, solvency, inflation, current account balance, terms of trade and real exchange rates. On

the other hand, variables such as quality of institutions, structural factors, access to global

capital, global factors, global risk aversion, and past repayment history also have an impact on

sovereign spreads.

Page 13: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

6

2.2 Institutional and Political Factors

An important part of the literature investigates the influence of institutional and political

factors on sovereign debt spreads. Baldacci et al. (2011) find a significant effect of political and

fiscal factors on bond spreads. Political stability, strong democratic institutions, low levels of

government intervention in the economy, and greater fiscal consolidation reduce bond spreads in

emerging economies. The literature suggests that political factors influence credit risk in

emerging markets. Butler and Fauver (2006) use a sample of both developed and emerging

markets and find that the quality of legal and political institutions are more important than

traditional macroeconomic variables and other variables commonly linked to credit risk. The

authors use six factors to measure the quality of legal and political institutions: rule of law,

political stability, voice of the people, corruption control, government effectiveness, and

regulatory quality. Hallerberg and Wolff (2008) point out the importance of fiscal institutions in

the Eurozone. Better quality institutions are shown to reduce risk premiums and lower the effects

of deficits on risk premiums.

Much has been written about the influence of the Political Business Cycle (PBC) theory on

sovereign debt spreads. Block and Vaaler (2004) investigate how the PBC affects both credit

ratings and bond spreads in developing countries. Their results show that credit rating agencies

downgrade sovereign bonds by one rating level during election years. In addition, bond spreads

are higher in the 60 days before the election than in the 60 days after it. Vaaler, Schrage, and

Block (2005) find effects on sovereign bonds spreads in developing countries during electoral

periods depending on who is expected to win the election. Sovereign risk premiums increase

when a left-wing candidate is expected to win and replace a right-wing government, and

decrease when a right-wing candidate is expected to win and replace a left-wing government.

Page 14: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

7

Studies that go beyond the effects of the political system on sovereign debt risk premium

examine the effects of form of government and electoral system, two important areas within the

political system. Van Rijckeghem and Weder (2009) and Kohlscheen (2010) find that democratic

emerging countries with presidential forms of government have greater sovereign debt default

rates than countries with parliamentary forms of government. Both agree that parliamentary

systems provide more players with political veto power, and this reduces the possibility of

default. Van Rijckeghem and Weder (2009) suggest that political institutions can reduce the debt

default risk; however, this only happens with some economic and finance conditions, specifically

high international liquidity, strong economic fundamentals, and economic openness.

Cheibub (2006) compares presidential with parliamentary systems by studying government

budget balances and finds lower deficits in presidential than in parliamentary democracies. The

results are consistent with Van Rijckeghem and Weder (2009) and Kohlscheen (2010). The

number of parties in the government and whether they have a majority in the parliament do not

appear to affect deficits. More important is the presidential or parliamentary system form of

government. In a presidential system, voters directly control the President and incentivize the

government to keep balanced budgets.

Besides the form of government, the internal processes within the political structure may also

be important. Alesina and Drazen (1991) explain the political process of negotiating who suffers

the burden of a stabilization program. To reduce the deficit, the government has to increase taxes

or reduce expenditure, with the fiscal burden likely to be imposed disproportionately on one

sector of society. More politically polarized countries will take more time to implement

stabilization programs because the negotiation process is more difficult. More cohesive societies

will experience a more equal and faster stabilization.

Page 15: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

8

Roubini and Sachs (1989) study this negotiation process in coalition governments and find

that it is more difficult to achieve an agreement in uncohesive coalition governments. They find

that budget deficits are greater when the government tenure is shorter and there are more parties

in the government. The more parties, the more veto players and the more difficult it is to reach an

agreement of who suffers the costs of the adjustment. According to game theory, as the

government tenure is shorter, there is less cooperation within the parties in the coalition

government, and stabilization programs are more difficult to implement. Furthermore, the

process of negotiation is similar to the Prisoner's Dilemma. All coalition parties know that the

stabilization is necessary, but they block spending cuts in their own areas, resulting in a

noncooperative solution.

Using data from developing countries, Saiegh (2009) finds a lower probability of debt

repudiation when there is a multiparty coalition government. The explanation is that people who

want the government to pay its debt form a small group within the population. Therefore, their

interests are more likely to be represented in the government if there are many parties in the

coalition.

Bawn and Rosenbluth (2006) explain that when there is only a one party majority, the

government only implements policies that benefit its voters. Tsebelis (2002) points out that many

parties act as veto players and lock in economic policy. These arguments suggest that multi party

coalition governments default less on sovereign debt than single party governments.

Most of the literature reviewed here refers to how political factors affect sovereign debt

default rates and deficits. There is a notable gap in the literature, however, regarding how these

factors affect sovereign debt spreads.

Page 16: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

9

Electoral systems may be a political factor that affects sovereign debt spreads as they have an

influence on the economic policy of the government. According to Iversen and Soskice (2006),

in a study of OECD countries, proportional electoral systems usually lead to center-left

governments, and majoritarian electoral systems usually lead to center-right governments.

Center-left governments implement more redistributive policies than the center-right, so

proportional electoral systems redistribute more than majoritarian systems. This could increase

sovereign debt default risk and directly affect sovereign debt interest rates.

In sum, political and institutional factors have an important influence on sovereign default

risk and, hence, on sovereign spreads. Factors included in previous studies are: political

instability and polarization, quality of legal and political institutions, strong democratic

institutions, low level of government intervention in the economy, greater fiscal consolidation,

the Political Business Cycle (PBC), the form of government, the number of parties and tenure of

the government, and cohesion of the coalition government. The effect of electoral systems on

sovereign spreads still has not been investigated. Electoral systems, however, directly affect the

economic policy of a country, thus it could influence sovereign spreads.

Page 17: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

3. HYPOTHESES

The primary purpose of this study is to analyze the effects of electoral systems on sovereign

debt spreads. I expect higher sovereign debt spreads in countries with proportional electoral

systems than in countries with majoritarian electoral systems. Other research questions focus on

the effects on sovereign debt spreads of a government coalition, the number of parties in

parliament, a government majority in parliament and the ideology of the government.

The electoral system of a country affects its economic policy. As shown by Iversen and

Soskice (2006), countries with proportional electoral rules implement more redistributive

policies as these countries are frequently governed by center-left parties. Austen-Smith (2000)

also finds that proportional electoral systems are associated with higher redistributive policies.

According to Saiegh (2009), countries with proportional electoral rules default more often on

their sovereign debt than countries with majoritarian electoral rules. These results are consistent

with Iversen and Soskice (2006) and Austen-Smith (2000).

Another important result from Saiegh (2009) is that coalition governments default less on

sovereign debt than single party governments. However, Roubini and Sachs (1989) find higher

deficits when there is a coalition government. Bawn and Rosenbluth (2006) find greater

government spending when there are more parties in government. These results are contradictory

because sovereign debt default risk and higher deficits should be positively correlated.

Proportional electoral systems are usually associated with more parties in the parliament and

center-left governments. More parties usually lead to more political polarization and greater

political instability. This adds to the center-left government effect. In sum, proportional electoral

systems could increase sovereign debt default risk and directly affect sovereign debt interest

rates.

Page 18: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

11

The five hypotheses tested in this study are as follows:

H1: Majoritarian electoral systems are associated with lower sovereign debt spreads.

H2: Proportional electoral systems are associated with higher sovereign debt spreads.

Saiegh (2009) finds that countries with proportional electoral systems default more on its

sovereign debt than countries with majoritarian electoral rules. In this study the focus is on

sovereign debt spreads rather than sovereign debt defaults. These hypotheses are motivated by

the finding that proportional electoral systems lead to center-left governments, which is

associated with more redistributive policies (Austen-Smith, 2000). Further, proportional electoral

systems usually lead to more parties, which is associated with higher deficits (Bawn and

Rosenbluth, 2006).

H3: Sovereign debt spreads are lower with a coalition government.

Saiegh (2009) finds lower sovereign debt default rates when there is a coalition government.

He affirms that bond holders are a small group within the population and are more likely to be

represented in the government if there is a coalition government. With this hypothesis, I expect a

coalition government to affect sovereign debt spreads in the same way as with sovereign debt

default rates.

H4: Sovereign debt spreads are higher when there are more parties in parliament.

More parties increase political uncertainty and lead to higher sovereign debt spreads. Also

more parties may increase deficits (Bawn and Rosenbluth, 2006) and should affect sovereign

debt spreads. Alesina and Drazen (1991) point out the importance of the negotiation process in

reducing a deficit. It would be easier if there are fewer parties.

H5: Sovereign debt spreads are lower when there is a government majority in parliament.

Page 19: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

12

A government majority in parliament reduces political uncertainty and this leads to lower

sovereign debt spreads. This notion is also consistent with Alesina and Drazen (1991) because

the negotiation process of reducing deficits would be easier.

H6: Sovereign debt spreads are lower when the government is ideologically right oriented.

Center-right governments would be more concerned with debt repayment and less with

redistributive policies than center-left governments (Iversen and Soskice, 2006). This would

cause lower sovereign debt spreads when there is a right-wing government. Saiegh (2009) finds

lower sovereign debt default rates with center-right governments.

Page 20: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

4. DATA AND METHODOLOGY

This section is divided in two parts. The first part describes the data used to test the

hypotheses and the second explains the model and methodology used.

4.1 Data

Data to test the effects of electoral systems and other political factors on sovereign debt

spreads consist of 676 observations from 39 democratic countries between 1981 and 2011. The

choice of these countries and observations was based on data availability. Appendix A provides a

list of countries included in the sample.

Sovereign debt spreads and other economic variables are obtained from the International

Financial Statistics (IFS) database of the International Monetary Fund (IMF) and from the

International Debt Statistics (IDS) database of the World Bank (WB).

The original source of most of the political data is Beck, Clarke, Groff, Keefer, and Walsh

(2001) Database of Political Institutions (DPI) 2012. However, in the case of electoral systems

data, the original source is Bormann and Golder (2013) Democratic Electoral Systems (DES)

dataset. Both DPI and DES datasets are obtained from Teorrell et al. (2013) The Quality of

Government Dataset, which is a pool of variables from other original or secondary sources, and

has helped me to merge all the variables.

Two important assumptions are made when treating the data. Firstly, the electoral systems

dataset gives the electoral systems used in the year with elections. Then I have to assume that the

electoral system remains unchanged during the years with no elections, which is a very realistic

assumption. Secondly, I use the Cheibub, Gandhi, and Vreeland (2010) classification of political

Page 21: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

14

regimes as democracy and dictatorship from 1946 to 2008 to delete non democratic countries, as

the purpose of my paper is to analyze only democratic countries. The assumption is that

democratic countries in 2008 are still democracies during years 2009-2011.

Table 1 provides the list of variable definitions and original sources and descriptive statistics

for the country-year observations. Appendix B shows sample averages by country. The

correlation matrix is shown in Appendix C.

Table 1. Descriptive statistics for the country-year

Variable Definition Original

Source N Mean

Std

Dev Minimum Maximum

SPREAD Sovereign Debt Spreads IFS (IMF) 676 1.26 3.46 -7.74 33.90

MAJ Majoritarian Electoral System DES 676 0.21 0.41 0 1

PRO Proportional Electoral System DES 676 0.61 0.49 0 1

MIX Mixed Electoral System DES 676 0.17 0.38 0 1

GOVC Government Coalition DPI 676 0.69 0.46 0 1

PP Parties in Parliament DPI 676 8.17 8.04 2 109

GOVM Goverment Majority DPI 676 0.74 0.44 0 1

RIGHT Right Government Ideology DPI 612 0.47 0.50 0 1

LEFT Left Government Ideology DPI 612 0.15 0.35 0 1

CENTER Center Government Ideology DPI 612 0.39 0.49 0 1

DEBT Government Debt (%GDP) IFS (IMF) 676 58.02 30.68 6.07 215.95

DEFSUR Gov. Deficit/Surplus (%GDP) IFS (IMF) 676 -2.56 4.58 -30.54 18.79

GDPG GDP % Growth IFS (IMF) 676 2.61 3.36 -17.73 27.18

STDR Short-Term Debt (%Reserves) IDS (WB) 96 53.02 36.48 2.76 215.38

STDTD Short-Term Debt (% Total Debt) IDS (WB) 96 17.97 10.07 1.30 45.72

SPR Sum of Past Reschedulings IDS (WB) 96 3.42 3.95 0 16

Page 22: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

15

As shown in Figure 1, proportional electoral systems represent 61% of the observations.

Majoritarian and mixed electoral systems represent 22% and 17%, respectively. Figure 2 shows

right-wing governments represent 47% of the observations, center governments represent 39%

and left-wing governments represent only 14%.

Figure 1. Electoral Systems Figure 2. Government Ideologies

Table 2 shows the relation between the electoral system and the government ideology. The

sample is consistent with Iversen and Soskice (2006) findings. Majoritarian electoral systems are

associated with center-right governments and there are many more left governments with

proportional systems than with majoritarian ones - 70 versus 3, respectively.

Table 2. Electoral systems and government ideology

Electoral System Right Left Center Total Propotion of right

governments

Proportion of left

governments

Majoritarian 77 3 56 136 56.62% 2.21%

Proportional 150 70 149 369 40.65% 18.97%

Mixed 60 16 31 107 56.07% 14.95%

Total 287 89 236 612

Page 23: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

16

4.2 Methodology

To estimate the impact of political factors on sovereign debt spreads, the following model is

estimated using ordinary least squares:

SPREADit = α0 + α1ELESYSit + α2GOVCit + α3PPit + α4GOVMit + α5IDEOLOGYit

+ α6ECONit + ε

The dependent variable in the model is the sovereign debt spread (SPREAD) for each country

and year in the sample and is defined as the difference between a country’s 10-year government

bond rate and the 10-year Treasury note rate of the United States. U.S. Treasury yields are

almost always used as the risk-free rate when studying country risk premium differences. They

are used by Min (1998) and Hilscher and Nosbusch (2010), among others.

Electoral System (ELESYS) is defined as either Majoritarian (MAJ), Proportional (PRO) or

Mixed (MIX) using Bormann and Golder (2013) classification. Appendix D provides a glossary

of electoral system terms. MAJ is a dummy variable that takes the value of 1 if the electoral

system uses majoritarian formulas and 0 otherwise. The coefficient of this variable is expected to

be negative. PRO is a dummy variable that takes the value of 1 if the electoral system uses

proportional formulas and 0 otherwise. The coefficient of this variable is expected to be negative.

Both variables are used to test H1 and H2: the effect of either majoritarian or proportional

electoral system on sovereign debt spreads. Saiegh (2009) uses a proportional electoral system

dummy variable to analyze how electoral rules affect sovereign default rates. MIX is a dummy

variable that takes the value of 1 if the electoral system uses mixed formulas and 0 otherwise.

GOVC is a dummy variable that takes the value of 1 if the government is a multiparty

coalition and 0 otherwise. A government is a multiparty coalition when it is formed by two or

more political parties represented in the parliament (considering the Lower House in the case of

Page 24: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

17

bicameral legislatures). Saiegh (2009) uses this variable. This variable is needed to test H3: the

effect of a coalition government on sovereign debt spreads. The coefficient is expected to be

negative.

PP indicates the total number of political parties represented in parliament (considering the

Lower House in the case of bicameral legislatures). This variable is needed to test H4: the effect

of the number of political parties in parliament on sovereign debt spreads. The coefficient is

expected to be positive.

GOVM is a dummy variable that takes the value of 1 if the government holds more than 50%

of the seats in parliament (considering the Lower House in the case of bicameral legislatures)..

This variable is used to test H5: the effect of a government majority in parliament on sovereign

debt spreads. The coefficient of this variable is expected to be negative.

IDEOLOGY is defined as the largest government party ideology orientation and includes

three dummy variables. The ideology can be either RIGHT, LEFT or CENTER. Saiegh (2009)

uses RIGHT. I use this variable to test the effect of government ideology on sovereign debt

spreads. The coefficient is expected to be negative.

GOVC, PP, GOVM, ELESYS and IDEOLOGY are the variables of study. Moreover, ECON

includes six economic control variables: DEBT, DEFSUR, GDPG, STDR, STDTD and SPR.

DEBT is defined as general government gross debt as a percentage of GDP. It is a measure of

the solvency of a country. Sovereign spreads increase as debt relative to GDP increases (Min,

1998; Blanchard, 2006; Baldacci and Kumar, 2010). This variable is used by Van Rijckeghem

and Weder (2009), Saiegh (2009) and Kohlscheen (2010) to study sovereign default rates. The

variable is lagged one year. The coefficient of the variable is expected to be positive.

Page 25: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

18

DEFSUR definition is general government net lending borrowing as a percentage of GDP. If

the value is negative, it is a public deficit, and if the value is positive, it is a public surplus.

Public deficits increase debt to GDP and reduce the solvency of a country. This is explained

among others by Elmendorf and Mankiw (1998) and Baldacci and Kumar (2010). Blanchard

(2006) explains how when public deficits are not controlled, this can lead to greater sovereign

spreads and finally the government has to default on its sovereign debt. Van Rijckeghem and

Weder (2009) use this variable to explain sovereign defaults. The coefficient of the variable is

expected to be negative.

GDPG is defined as GDP volume percentage change. GDP growth improves the ability to

repay debt as debt to GDP rate decreases. This variable is used among others by Cheibub (2006),

Van Rijckeghem and Weder (2009), Saiegh (2009) and Kohlscheen (2010). The coefficient of

this variable is expected to be negative.

STDR is defined as short-term debt as a percentage of total reserves. It is a measure of

liquidity and considered an important measure of default risk. Min (1998) and other previous

studies confirm it. Van Rijckeghem and Weder (2009) used it in their model. The coefficient of

this variable is expected to be positive.

STDTD is defined a short-term debt as a percentage of total external debt. Very often

countries default because they are not able to roll over some of the maturing debt. If a country

with a high level of short-term debt cannot change it to long-term, the country could not be able

to repay its debt. This is confirmed by previous studies. Saiegh (2009) uses this variable in his

model. The coefficient of this variable is expected to be positive.

Finally, SPR is the sum of the number of past years with debt rescheduled (interests or

principal). The sum starts in 1991 because there is not data of total amount of debt rescheduled

Page 26: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

19

until 1990. Past repayment history is also an important factor influencing the sovereign debt

premium risk. Reinhart et al. (2003) explains country's external debt intolerance as a result of its

repayment history, debt levels, and history of macroeconomic stability. A country that has

previously defaulted has more possibilities to default again on its external debt. Saiegh (2009)

uses the sum of past reschedulings to explain actual debt rescheduling. The coefficient of this

variable is expected to be positive.

Page 27: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

5. RESULTS

Table 3 shows the results of three regressions on sovereign debt spreads. Model 1 and Model

3 include all economic control variables. Because of this, the sample is reduced to 96

observations. Model 2 includes less economic control variables and uses 612 observations.

Note that PRO, MAJ and MIX are highly correlated and the same occurs between RIGHT,

LEFT and CENTER. Therefore, the three categories of electoral system or ideology cannot be

used simultaneously.

Model 1 explains 24.61% of change in sovereign debt spreads. Among the economic

variables, only GDPG is significant with an expected negative coefficient, which suggest that

economic growth improves the ability to repay the debt and reduces sovereign debt spreads.

Among the variables of study, MAJ and PP are significant and GOVC and GOVM are not

significant. The positive coefficient on MAJ supports Hypothesis 1 and the negative coefficient

on PP supports Hypothesis 4, meaning that majoritarian electoral systems and fewer parties in

parliament reduce sovereign debt spreads.

Model 2 explains 17.25% of change in sovereign debt spreads. The three economic variables

used are significant. The coefficient of DEBT is negative, which is contrary to the expected sign.

The coefficient of DEFSUR and GDPG is negative as expected. The negative coefficient on

DEFSUR suggests that government budget deficits increase sovereign debt spreads and surpluses

reduce spreads. All the variables of study included in the model are significant and with the

expected sign. MAJ, GOVC, GOVM and RIGHT have negative coefficients and PP has a

positive one. These results again support Hypothesis 1 and 4, but also support Hypothesis 3, 5

and 6, adding three more factors that reduce sovereign debt spreads: a government coalition, a

government majority in parliament, and the existence of a right-wing government. This means

Page 28: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

21

that, a part of the electoral system and the number of parties in parliament, the government

composition, ideology and its share in parliament influences sovereign debt spreads.

Model 3 explains 49.26% of change in sovereign debt spreads. This model is very similar to

Model 1 as it also includes all economic variables. However, it includes PRO instead of MAJ

and does not include GOVC. The purpose of this model is to test Hypothesis 2 (the effect of

proportional electoral systems on sovereign debt spreads) that has not been tested by Models 1

and 2. As in Models 1 and 2, GDPG coefficient is negative and significant. STDTD and SPR

coefficients are both negative and significant, which is contrary to the expected sign. All the

variables of study included in the model are significant and with the expected sign. Coefficients

on PRO and PP are positive and the coefficient on GOVM is negative. PP and GOVM

coefficients again satisfy Hypothesis 4 and 5, and PRO coefficient supports Hypothesis 2,

meaning that proportional electoral systems produce the opposite effect of majoritarian electoral

systems, and increase sovereign debt spreads.

Overall, the findings support the importance of the institutional environment in determining

sovereign debt spreads. This study finds that the electoral system, the government and parliament

composition, the share of the government in parliament and the government ideology are all

important factors in determining sovereign debt spreads. Five factors lower sovereign debt

spreads: majoritarian electoral systems, the existence of a government coalition, fewer parties in

parliament, a government majority in parliament and the existence of a right-wing government.

Page 29: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

22

Table 3. Regression Results of Sovereign Debt Spreads

The regressions are estimated using OLS with White's (1980) corrected for heteroskedasticity.

Heterokesdasticity consistent standard errors are in parentheses. *** Significant at a 1% level,

** significant at a 5% level, * significant at a 10% level.

Model 1 Model 2 Model 3

Intercept 7.2349** 2.6883*** 9.5056***

(3.3458) (0.3598) (2.3030)

MAJ -4.1079*** -0.6139**

(1.3060) (0.2935)

PRO

8.2937***

(1.5598)

GOVC 1.4063 -0.7606***

(1.7041) (0.2567)

PP 0.0655*** 0.0382** 0.0551***

(0.0191) (0.0186) (0.0107)

GOVM -2.0805 -0.3850* -3.1352***

(1.4627) (0.2304) (0.9751)

RIGHT

-0.8434***

(0.2257)

DEBT 0.0386 -0.0148*** 0.0064

(0.0443) (0.0042) (0.0296)

DEFSUR 0.0788 -0.1646** 0.0469

(0.1630) (0.0232) (0.1049)

GDPG -0.4939** -0.0945** -0.5351***

(0.2411) (0.0416) (0.1681)

STDR -0.0041

0.0061

(0.0126)

(0.0116)

STDTD -0.0003

-0.1097*

(0.0591)

(0.0565)

SPR -0.2238

-0.5253***

(0.1817)

(0.1533)

N 96 612 96

R^2 0.2461 0.1725 0.4926

Page 30: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

23

The higher sovereign debt spreads of countries with proportional electoral systems than of

those countries with majoritarian electoral systems is consistent with prior literature. As shown

by Iversen and Soskice (2006), proportional electoral rules are associated with left-wing

governments and majoritarian electoral rules with right-wing governments, and left-wing

governments implement more redistributive policies than the right-wing ones. This correlation

between electoral rules and economic policy is also mentioned by Austen-Smith (2000).

Moreover, Saiegh (2009) finds that countries with proportional electoral rules default more often

on their sovereign debt than countries with majoritarian electoral rules. The finding that right-

wing governments have lower sovereign spreads is also in line with Iversen and Soskice (2006)

and Saiegh (2009).

The result that countries with a coalition government have lower sovereign debt spreads

agrees with Saiegh (2009) who finds lower sovereign debt default rates when there is a coalition

government. According to Saiegh (2009), a coalition government would have a better economic

policy for the interests of the bond holders as they are more likely to be represented in the

government if there is a coalition government.

Finally, the results show higher sovereign debt spreads with more parties in parliament and

when there is not a government majority in parliament. This is consistent with the findings of

Alesina and Drazen (1991), who point out the importance of the negotiation process in reducing

a deficit. A country with many parties in parliament and without a government majority in

parliament would complicate a budget expenditure reduction proposed by the government to be

able to pay for its sovereign debt.

Page 31: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

6. DISCUSSION AND CONCLUSIONS

The research confirms the view that the institutional and political environment matter and

influence sovereign debt spreads. The study finds that countries with majoritarian electoral

systems have lower sovereign debt spreads than countries with proportional electoral systems.

Majoritarian electoral systems lead to right-wing governments and proportional electoral systems

to left-wing governments, and this has implications in terms of economic policy, because left-

wing governments implement more redistributive policies than right-wing governments (Iversen

and Soskice, 2006). The main reason why countries with majoritarian electoral systems have

lower sovereign debt spreads may be because their governments are more concerned with

sovereign debt repayment than with applying redistributive policies. In fact, I find that countries

with right-wing governments also have lower sovereign debt spreads. Furthermore, majoritarian

electoral systems could also lead to moderation and stability within the political system, which

reduces country risk. The study also finds lower sovereign debt spreads when there is a

government coalition, fewer parties in parliament and a government majority in parliament.

The main limitation of this study is the difference in sample size between model

specifications due to data availability. When including all economic control variables, the sample

is reduced from 612 to 96 observations. Nevertheless, most of the results from Models 1 and 3

(with 96 observations) are also confirmed by Model 2 (with 612 observations). The effects of

proportional electoral systems on sovereign debt spreads is the only factor not tested in Model 2.

However, this is not an important problem as majoritarian electoral systems are tested and

confirms the significance of electoral systems on sovereign debt spreads.

The findings pose important implications for official creditors such as the International

Monetary Fund or the World Bank, as these organizations should give more importance to

Page 32: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

25

internal political variables rather than focus almost exclusively on macroeconomic indicators to

evaluate a country’s sovereign debt sustainability. Besides, parliament members from countries

with usually very high sovereign debt risk premiums should consider these findings to analyze if

a change in its electoral system is desirable.

Page 33: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

REFERENCES

Alesina, A. and Drazen, A. (1991). Why are stabilizations delayed?. American Economics

Review, 81(5), 1170-1188.

Austen-Smith, D. (2000). Redistributing income under proportional representation. Journal of

Political Economy, 108(6), 1235-1269.

Baldacci, E., Gupta, S., and Mati, A. (2011). Political and fiscal risk determinants of sovereign

spreads in emerging markets. Review of Development Economics, 15(2), 251-263.

Baldacci, E. and Kumar, M. S. (2010). Fiscal deficits, public debt, and sovereign bond yields.

IMF Working Paper No. 184.

Bawn, K. and Rosenbluth, F. (2006). Short versus long coalitions: electoral accountability and

the size of the public sector. American Journal of Political Science, 50(2), 251-265.

Beck, T., Clarke, G., Groff, A., Keefer, P., and Walsh, P. (2001). New tools in comparative

political economy: The Database of Political Institutions. World Bank Economic Review, 15(1),

165-176.

Blanchard, O. (2003). Macroeconomics. (Third ed., pp. 562-563). New Jersey: Prentice Hall.

Block, S. A. and Vaaler, P. M. (2004). The price of democracy: sovereign risk ratings, bond

spreads and political business cycles in developing countries. Journal of International Money

and Finance, 23(6), 917-946.

Bormann, N. C and Golder, M. (2013). Democratic electoral systems around the world, 1946-

2011. Electoral Studies, 32, 360-369.

Buschanan, J. (1976). Perceived wealth in bonds and social security: a comment. Journal of

Political Economy, 84(2), 337-342.

Butler, A. W. and Fauver, L. (2006). Institutional environment and sovereign credit ratings.

Financial Management, 35(3), 53-79.

Caceres, C., Guzzo, V., and Segoviano, M. (2010). Sovereign spreads: global risk aversion,

contagion or fundamentals?. IMF Working Paper No. 120.

Cheibub, J. A. (2006). Presidentialism, electoral identifiability, and budget balances in

democratic systems. The American Political Science Review, 100(3), 353-368.

Cheibub, J. A., Gandhi, J., and Vreeland, J. R. (2010). Democracy and dictatorship revisited.

Public Choice, 143, 67-101.

Page 34: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

27

Codogno, L., Favero, C., Missale, A., Portes, R., and Thum, M. (2003). Yield spreads on EMU

government bonds. Economic Policy, 18(37), 503-532.

Edwards, S. (1984). LDC foreign borrowing and default risk: an empirical investigation, 1976-

80. The American Economic Review, 74(4), 726-734.

Elmendorf, D. W. and Mankiw N. G. (1998). Government debt. NBER Working Paper No.

6470.

Feldstein, M (1976). Perceived wealth in bonds and social security: a comment. Journal of

Political Economy, 84(2), 331-336.

Guscina, A. (2008). Impact of macroeconomic, political, and institutional factors on the structure

of government debt in emerging market countries. IMF Working Paper No. 205.

Hallerberg, M. and Wolff, G. B. (2008). Fiscal institutions, fiscal policy and sovereign risk

premia in EMU. Public Choice, 136(3), 379-396.

Haugh, D., Ollivaud, P., and Turner, D. (2009). What drives sovereign risk premiums?: an

analysis of recent evidence from the euro area. OECD Economics Department Working Papers

No. 718.

Hilscher, J. and Nosbusch, Y. (2010). Determinants of sovereign risk: macroeconomic

fundamentals and the pricing of sovereign debt. Review of Finance, 14(2), 235-262.

Iversen, T. and Soskice, D. (2006). Electoral institutions and the politics of coalitions: why some

democracies redistribute more than others. The American Political Science Review, 100(2), 165-

181.

Kohlscheen, M. (2010). Sovereign risk: constitutions rule. Oxford Economic Papers, 62(1), 62-

85.

Longstaff, F.A., Pan, J., Pedersen, L.H., and Singleton, K. J. (2011). How sovereign is sovereign

credit risk?. American Economic Journal: Macroeconomics, 3(2), 75-103.

Mankiw, G. (2003). Macroeconomics. (Fifth ed., pp. 415-417). New York: Worth Publishers.

Min, H. G. (1998). Determinants of emerging market bond spread: do economic fundamentals

matter?. The World Bank, Policy Research Paper No. 1899.

Pan, J. and Singleton, K. J. (2008). Default and recovery implicit in the term structure of

sovereign CDS spreads. The Journal of Finance, 63(5), 2345-2384.

Reinhart, C., Rogoff, K., and Savastano,M. (2003). Debt intolerance. Brookings Papers on

Economic Activity, 1(1), 1-74.

Page 35: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

28

Roubini, N. and Sachs, J. D. (1989). Political and economic determinants of budget deficit in the

industrial democracies. European Economic Review, 33(5), 903-938.

Saiegh, S. M. (2009). Coalition governments and sovereign debt crisis. Economics & Politics,

21(2), 232-254.

Teorell, Jan, Nicholas Charron, Stefan Dahlberg, Sören Holmberg, Bo Rothstein, Petrus Sundin,

and Richard Svensson. (2013). The Quality of Government Dataset, version 15May13.

University of Gothenburg: The Quality of Government Institute, http://www.qog.pol.gu.se.

Tsebelis, G. (2002). Veto players: how political institutions work. Princeton, NJ: Princeton

University Press.

Uhrig-Homburg, M. (2013). Sovereign credit spreads. Journal of Banking & Finance, 37(11),

4217-4225.

Vaaler, P. M., Schrage, B. N., and Block, S. A. (2005). Counting the investor vote: political

business cycle effects on sovereign bond spreads in developing countries. Journal of

International Business Studies, 36(1), 62-88.

Van Rijckeghem, C. and Weder, B. (2009). Political institutions and debt crises. Public Choice,

138(3), 387-408.

Westphalen, M. (2001). The determinants of sovereign bond credit spreads changes.

Unpublished working paper, Université de Lausanne.

Page 36: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

APPENDIX A. LIST OF COUNTRIES IN THE SAMPLE

Country Total years

Austria 23

Belgium 31

Bulgaria 11

Cyprus 10

Czech Republic 11

Denmark 19

Finland 23

France 31

Germany 20

Greece 20

Honduras 7

Hungary 10

Ireland 31

Italy 23

Japan 31

Latvia 10

Lithuania 9

Luxembourg 16

Maldives 2

Malta 10

Mexico 11

Netherlands 16

New Zealand 26

Norway 31

Pakistan 7

Philippines 13

Poland 10

Portugal 21

Romania 5

Slovak Republic 11

Slovenia 8

Spain 31

Sweden 18

Switzerland 28

Thailand 12

United Kingdom 31

United States 31

Vanuatu 5

Venezuela, Rep. Bol. 13

TOTAL 676

Page 37: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

APPENDIX B. SAMPLE AVERAGES BY COUNTRY

Country SPREAD MAJ PRO MIX GOVC PP GOVM RIGHT LEFT CENTER

Austria -0.03 0 1 0 1 4.48 1 0.30 0 0.70

Belgium 0.24 0 1 0 1 9.94 0.87 0.97 0 0.03

Bulgaria 1.57 0 0.73 0.27 0.91 5.36 1 1 0 0

Cyprus 1.01 0 1 0 1 7.00 0.80 0.70 0 0.30

Czech Republic 0.16 0 1 0 0.82 4.45 0.45 0 0 1

Denmark 0.12 0 1 0 1 8.11 0.26 0.58 0 0.42

Finland 0.95 0 1 0 1 8.22 1 0 0.61 0.39

France 0.40 0.94 0.06 0 1 8.23 0.77 0.52 0 0.48

Germany -0.25 0 0 1 1 5.70 1 0.65 0 0.35

Greece 3.71 0 0.75 0.25 0 4.35 1 0.25 0 0.75

Honduras 6.49 0 1 0 0 5 0.14 1 0 0

Hungary 3.53 0 0 1 0.50 4 1 0.10 0 0.90

Ireland 1.29 0 1 0 0.90 6.71 0.58 0.29 0.71 0

Italy 1.82 0 0.48 0.52 0.39 6.70 0.78 0.43 0.48 0.09

Japan -3.35 0.48 0 0.52 0.55 15.90 0.74 0.97 0 0.03

Latvia 2.39 0 1 0 1 5.70 0.70 0.22 0.78 0

Lithuania 2.09 0 0 1 1 11.33 0.78 0.43 0 0.57

Luxembourg -0.41 0 1 0 1 5.44 1 0 1 0

Maldives 5.00 1 0 0 1 18 0 1 0 0

Malta 0.76 0 1 0 0 2 1 1 0 0

Mexico 4.55 0 0 1 0.55 7.27 0 1 0 0

Netherlands -0.28 0 1 0 1 10.44 0.88 0.56 0 0.44

New Zealand 2.23 0.38 0 0.62 0.65 5.38 0.77 0.46 0 0.54

Norway 0.87 0 1 0 0.87 7.61 0.29 0.45 0 0.55

Pakistan 7.01 1 0 0 0.57 55 0.14 0 0 1

Philippines 5.99 0.23 0 0.77 1 13.69 0.77 0 1 0

Poland 2.04 0 1 0 1 7 1 0.33 0 0.67

Portugal 1.79 0 1 0 0.14 5 0.57 0.38 0 0.62

Romania 4.19 0 0 1 1 12.20 0.60 - - -

Slovak Republic 0.96 0 1 0 1 5.73 1 0 0 1

Slovenia 0.47 0 1 0 1 7.63 0.63 0 0.50 0.50

Spain 2.09 0 1 0 0.13 11.19 0.61 0.26 0.06 0.68

Sweden 0.30 0 1 0 0.78 6.72 0.67 0.33 0 0.67

Switzerland -2.61 0 1 0 1 11.43 1 0.60 0 0.40

Thailand 1.19 1 0 0 1 7.08 1 1.00 0 0

United Kingdom 0.72 1 0 0 0.03 9.45 1 0.58 0 0.42

United States 0 1 0 0 0 2.52 0.39 0.58 0 0.42

Vanuatu 3.44 1 0 0 1 6.20 1 0.20 0 0.80

Venezuela, Rep. Bol. 14.99 0 1 0 0.92 6.23 0.85 - - -

Page 38: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

31

Country DEBT DEFSUR GDPG STDR STDTD SPR

Austria 63.52 -2.71 2.26 - - -

Belgium 111.07 -5.30 2.69 - - -

Bulgaria 36.51 0.48 3.94 64.73 27.16 6.00

Cyprus 63.38 -3.22 2.36 - - -

Czech Republic 28.34 -4.00 3.29 - - -

Denmark 53.11 0.24 1.59 - - -

Finland 40.58 0.50 2.02 - - -

France 48.71 -3.49 1.89 - - -

Germany 60.36 -2.70 1.45 - - -

Greece 98.97 -7.38 1.98 - - -

Honduras 61.23 -3.87 5.15 20.83 7.86 13.43

Hungary 65.55 -5.33 1.82 84.81 15.91 0

Ireland 68.95 -4.54 4.57 - - -

Italy 108.09 -5.45 1.22 - - -

Japan 114.06 -4.12 2.11 - - -

Latvia 17.62 -3.21 3.81 - - -

Lithuania 22.30 -3.39 4.22 - - -

Luxembourg 8.47 1.97 3.79 - - -

Maldives 56.45 -14.32 11.33 63.56 22.66 0

Malta 63.84 -4.18 2.14 - - -

Mexico 41.20 -2.45 2.11 33.61 13.87 6.55

Netherlands 58.23 -1.44 2.18 - - -

New Zealand 41.30 -0.14 2.85 - - -

Norway 41.30 7.50 2.53 - - -

Pakistan 65.19 -5.49 3.24 93.26 6.47 2.57

Philippines 59.37 -1.71 4.42 46.98 11.75 5

Poland 46.51 -5.01 4.24 - - -

Portugal 60.31 -5.29 1.73 - - -

Romania 18.78 -5.18 1.74 62.47 25.07 0

Slovak Republic 38.62 -3.93 4.76 - - -

Slovenia 28.37 -2.46 2.33 - - -

Spain 46.61 -3.64 2.62 - - -

Sweden 56.35 -0.44 2.81 - - -

Switzerland 50.56 -0.42 1.84 - - -

Thailand 46.48 -2.27 2.34 48.24 27.99 0

United Kingdom 44.41 -3.33 2.45 - - -

United States 61.57 -3.95 2.76 - - -

Vanuatu 34.12 -3.03 -1.14 16.51 5.81 0

Venezuela, Rep. Bol. 37.55 -2.51 2.81 49.99 25.09 1

Page 39: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

APPENDIX C. CORRELATION MATRIX

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

(1) SPREAD 1

(2) MAJ -0.06 1

(3) PRO 0.01 -0.66 1

(4) MIX 0.05 -0.24 -0.58 1

(5) GOVC -0.07 -0.30 0.21 0.05 1

(6) PP 0.07 0.09 -0.12 0.05 0.03 1

(7) GOVM -0.05 0.00 0.02 -0.02 0.18 -0.11 1

(8) RIGHT -0.18 0.10 -0.15 0.08 -0.01 0.00 0.04 1

(9) LEFT 0.12 -0.19 0.15 0.01 0.20 -0.01 0.01 -0.39 1

(10) CENTER 0.10 0.03 0.05 -0.09 -0.14 0.01 -0.05 -0.74 -0.33 1

(11) DEBT -0.12 -0.07 -0.08 0.18 -0.14 0.12 0.07 0.23 -0.16 -0.12 1

(12) DEFSUR -0.19 -0.09 0.15 -0.09 0.21 -0.06 -0.08 -0.07 0.03 0.04 -0.34 1

(13) GDPG -0.19 0.01 0.07 -0.10 0.02 0.01 -0.10 -0.04 0.09 -0.03 -0.05 0.24 1

(14) STDR -0.01 0.11 -0.15 0.04 0.21 -0.18 0.13 -0.20 -0.08 0.29 0.01 -0.18 -0.10 1

(15) STDTD -0.12 -0.02 0.19 -0.15 0.35 -0.30 0.36 0.33 -0.11 -0.26 -0.55 0.12 0.05 0.28 1

(16) SPR -0.02 -0.38 0.35 0.04 -0.50 0.09 -0.45 0.44 0.08 -0.54 0.12 0.18 0.18 -0.36 -0.32 1

Page 40: Annals of the University of North Carolina Wilmington ...Codogno, Favero, Missale, Portes, and Thum (2003) study how international risk factors increase default risk of sovereign bonds,

APPENDIX D. ELECTORAL SYSTEMS GLOSSARY

ELECTORAL SYSTEM

The electoral system determines how votes are translated into seats. There are three main

characteristics of any electoral system: a) the District Magnitude – the number of representatives

elected from the district; b) the Ballot Structure – the number of voting preferences given a voter

on a ballot for them to mark (sometimes the voter can rank-order the preferences); c) the

Electoral Formula – the method used to convert votes into seats, given the district magnitude and

ballot structure (it could include thresholds stipulating the percentage of votes necessary to get

elected).

MAJORITARIAN ELECTORAL SYSTEM

A majoritarian electoral system is one in which the candidates or parties that receive the most

votes win. Bormann and Golder (2013) include in majoritarian electoral systems: single-member

district plurality, alternative vote, single nontransferable vote, block vote, party block vote, borda

count, modified borda count, limited vote, and two-round systems.

MIXED ELECTORAL SYSTEM

A mixed electoral system is one in which voters elect representatives through two different

systems, one majoritarian and one proportional. Bormann and Golder (2013) classify an electoral

system as Mixed only when more than 5% of the total legislature is elected by a different

electoral formula (majoritarian or proportional) to that used to elect the other deputies. Mixed

electoral systems come in two varieties: independent and dependent.

PROPORTIONAL ELECTORAL SYSTEM

A proportional electoral system is a quota system or divisor system employed in multi-member

districts (where the quota is less than 50%). These voting systems attempt to make the

percentage of offices awarded to candidates reflect as closely as possible the percentage of votes

that they received in the election. This means that if a given political party) gets X% of the vote,

it should also get approximately X% of the seats in the legislature. Bormann and Golder (2013)

include in proportional electoral systems: list proportional representation systems and the single

transferable vote.