SUSTAINABILITY OF PUBLIC DEBTS IN TIMES OF CRISIS : HOW TO STRENGTHEN INVESTOR CONFIDENCE ?

Fiscal transparency has been central to the public debate since concerns over sovereign debt erupted into the modern euro crisis in 2010. But just how influential is fiscal transparency in dictating the perceptions of the investment community, and thus the conditions in which sovereign states finance themselves? This paper analyzes this question by researching the relationship between fiscal transparency (proxied by the Open Budget Index) and an indicator of financial market perceptions (5-year Credit Default Swap spreads). It concludes that, in the pre-crisis period, transparency had little to no significant impact on investor perceptions – it was, in short, ignored by investors that continued to give low interest rates to government borrowers with even the most non-transparent budget records. But this all changed since the start of the crisis in 2008, and markets have exhibited dramatically higher sensitivity to fiscal performance. In the post-2008 era, the relationship between fiscal transparency and investor perceptions has strengthened considerably. Furthermore, we find that budget execution (including, inter alia, audit and accounting standards), is the aspect of fiscal transparency that shows the greatest impact on market conditions in a time of crisis. Jules Tilly is a 2012 graduate of the M.P.A. in Public Policy and Management at the London School of Economics’ Institute of Public Affairs. Contact: J.Tilly1@lse.ac.uk.