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ABSTRACT
Financial markets play an indispensable role in the management of sovereign debt, that is, the mechanics of how and from whom governments borrow. This paper suggests a novel, two-dimensional concept to measure the financialisation of sovereign debt management (SDM): (1) the reliance on financial markets as a governance mechanism and (2) the adoption of a sense-making framework grounded in financial economics. We split this concept into nine indicators and apply it to data from 23 OECD countries between 1980 and 2010. Our analysis illustrates the predominant commonalities across countries, but at the same time, country-specific differences. We interpret them as two sides of the same coin in the light of an overarching trend of increasing alignment to financial markets. This article is not only one of the first cross-national as well as longitudinal studies of the dynamics in SDM; it also reveals that the relationship between finance and governments in the SDM is by no means one-sided.
Acknowledgements
We thank Renate Mayntz, Robert Boyer, our colleagues at the CCCP and the reviewers of this journal for their enlightening analytical advice. An earlier version of this paper was presented at the CES conference in Paris, 2015.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes on contributors
Florian Fastenrath is research fellow and Ph.D. candidate at the chair of International Comparative Political Economy and Economic Sociology at the Cologne Center for Comparative Politics (CCCP). In his research he explores processes of financialisation, the political economy of financial market regulation and of public finance.
Michael Schwan is Ph.D. fellow at the Cologne Graduate School (CGS) and the CCCP, University of Cologne. He works on processes of financialization of political economies with a special focus on European regions and different forms of debt.
Christine Trampusch is a professor of international comparative political economy and economic sociology at the CCCP. Her professorship is also Liaison Chair to the Max-Planck Institute for the Study of Societies (Brückenprofessur). Her current research projects cover the political economy of skill formation regimes, of welfare states, of industrial relations as well as of financial market regulation and of public finance. Her research has been published in various international and national peer-reviewed journals. Her co-edited volumes have been published by Oxford University Press and Routledge.
Notes
1 So far, financial markets have punished not only central governments but also local administrations for using derivatives. Notable examples are Orange County, CA, the London borough of Hammersmith and Fulham or the German city of Hagen.
2 Of course, debt levels and fiscal policies play a role as SDM seeks to cut down interest payments on public debt and thus indirectly reduce its level. Still, SDM does not include debt ceilings or other austerity policies.
3 Our sample contains different types of developed capitalist economies and thus is suitable for cross-national, inter-temporal comparison. Selecting 1980–2010 as our period of analysis is due to both data availability and the fact that the early 1980s saw the beginning of the financialisation of the economy. As the OECD currently modifies its database, data end in 2010.
4 One could also include other quantitative and qualitative indicators. However, due to the limited availability of cross-national data, we decided to concentrate on the nine we present in this paper. Other potential indicators are, for example: the introduction of risk-management software, system based on Value-at-Risk, the performance of DMOs against pre-defined benchmarks, the permission to use debt buybacks or Repos, the introduction of a regular issuance calendar or the possibility of stripping, that is, the separate trading of interests and debt titles in secondary markets. Another important aspect of SDM that underwent substantial changes are the maturities of outstanding debt. Although we had initially included them into our analysis, we finally decided to leave them out for two reasons. On the one hand, the data gaps are too large and the most common indicator for measuring maturities, the Macaulay duration, was not available for our country set at all; on the other hand, the correct interpretation of maturity requires enormous case-specific knowledge, for example, how maturities are combined with swap deals which make long-term maturities shorter.
5 While marketable debt instruments include short-term (Treasury bills), medium-term (notes) and long-term securities (bonds), typical non-marketable debt instruments are foreign-currency loans, loans from financial institutions and savings bonds for personal investors (cf. Missale Citation1999).
6 Hardie (Citation2012) speaks of the financialisation of the sovereign bond market, but he limits his analysis to emerging market economies and leaves out the management of sovereign debt.
7 However, as was nicely demonstrated in the aftermath of the recent financial crisis, central banks still have a certain influence on the interest rates of sovereign bonds.
8 In a survey report about DMOs in OECD countries, McCray (Citation2005: 75) notes that 55 per cent of all DMO staff are involved with middle office functions like portfolio management and risk management policy.
9 We have extracted our metric data – for the indicators marketable debt, marketable debt held by non-residents and marketable debt in foreign currency – mainly from the OECD Central Government Statistics database (2015), the collections of Missale (Citation1999) and Abbas et al. (Citation2014), as well as further primary sources such as annual DMO reports or treasury bulletins. For these indicators, we report the annual country values of their share of total outstanding central government debt as well as their medians. However, the available sources did not allow us to trace back the year of their first use (with exception of ILBs). Metric data on the use of ILBs, which we did not include in the main text due to the word constraint, are listed in the supplementary file. Regarding the indicators auctions, primary dealer systems, accruals accounting, DMOs and swaps, it is not possible to measure them metrically, either because of their qualitative nature or due to the lack of availability of data. Therefore, we identify the year of their introduction, which enables us to describe the timing of the reforms across countries. Overall, we have also sent out email inquiries to several national debt managers and central bankers. Nevertheless, despite thorough consultation of the material, there are still notable gaps in the data. In cases of doubt, we sought to obviate these by incorporating only values we were able to cross-reference. Since our data remain partially incomplete, please check the annotations below each figure for details.
10 Market liquidity generally refers to the ability of markets to facilitate quick transactions. This means, for instance, that once an asset is acquired, it can be sold again on short notice.
11 In the cases of Luxembourg and Japan, there is however, a very small share of non-marketable debt held by non-residents, which cannot be traded further on the secondary market. To the same extent, Switzerland has lately started to sell some titles to non-residents, although so far only less than 1 per cent.
12 There are roughly three types of selling techniques: Auctions, syndications and issuance on tap.
13 Most prominently, primary dealer systems typically include banks like Barclays, BNP Paribas, Citigroup, Deutsche Bank, J.P. Morgan, HSBC or Morgan Stanley.
14 Rollover risk is refinancing risk that occurs when debt is about to mature. If interest rates develop adversely when rolling over old with new debt, future payments are higher than before.