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1. Dealing Government Bonds: Trading Infrastructures and Infrastructural Power in European Markets for Public Debt

Author:
Arjen van der Heide
Publication Date:
02-2024
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Confronted with increased difficulties to raise taxation, high inflation, and pressures to maintain social spending, many rich democracies have increasingly sought to raise funds in financial markets since the 1970s. Using the notion of “infrastructural power,” this paper examines the various ways in which states have become infrastructurally entangled with key actors in financial markets that provide the infrastructure of today’s markets for government bonds. Drawing on twenty-two interviews with debt managers and market participants, and documentary material, the article analyses the rise to prominence of MTS (Mercato dei Titoli di Stato), an electronic platform for trading government bonds that has become a key feature of Europe’s government bond market infrastructure. It traces the emergence of MTS in Italy, its rapid diffusion through Europe and its limited (or even non-existent) success in gaining market share in Germany and the UK. In so doing, this paper finds that some debt management units actively regulate their secondary bond markets to stimulate competition among dealer banks; they “orchestrate” the market for government bonds. Others take a more hands-off approach and only engage with secondary markets mostly as market participants by issuing debt instruments and perhaps buying and selling them in the secondary market. These differences are important for understanding the politics of sovereign debt: they reflect power relations, may impact states’ cost of borrowing and their capacity to withstand moments of fiscal stress.
Topic:
Infrastructure, Financial Markets, Banks, Public Debt, and Bonds
Political Geography:
Global Focus

2. Sanction-busting through tax havens

Author:
Kerim Can Kavakli, Giovanna Marcolongo, and Diego Zambiasi
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Financial sanctions, which aim to economically hurt a target by restricting its access to financial assets and markets, require the ability to identify who owns an asset. Although experts have long claimed that offshore financial centres that offer secrecy (‘tax havens’) undermine sanctions by hiding ownership information, so far data limitations have prevented a rigorous test of this claim. We overcome this constraint using data from the Bank of International Settlements and the Offshore Leaks Database and conduct the first systematic analysis of the role that tax havens play in financial sanction evasion. Our main finding is that sanction targets reduce their funds in sanctioning countries while increasing their funds in tax havens. This displacement effect is stronger when the sanction coalition includes the United States or comprises more FATF or OECD members. Lastly, whether a tax haven is in the sanctioning coalition does not seem to make a difference. These findings confirm that target countries evade sanctions by moving large portions of their funds from sanctioning countries to tax havens. More broadly, our paper highlights a novel and geostrategically important role of tax havens in global finance.
Topic:
Sanctions, Financial Markets, Leaks, and Tax Havens
Political Geography:
Global Focus

3. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Z. Barta, Lucio Baccaro, and A. Johnston
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus

4. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Zsófia Barta, Lucio Baccaro, and Alison Johnston
Publication Date:
09-2022
Content Type:
Working Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
International Political Economy, Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus

5. Financial Sector Cybersecurity Requirements in the Asia-Pacific Region

Author:
William A. Carter and William Crumpler
Publication Date:
04-2019
Content Type:
Working Paper
Institution:
Center for Strategic and International Studies
Abstract:
As the threat of cyberattacks has risen in recent years, financial institutions (FIs) and regulators have taken a range of steps to strengthen the security and resilience of the financial system to cyber threats. In the Asia-Pacific region (APAC), regulators have introduced a raft of new regulations and controls to bolster the resilience of FIs in their jurisdictions. While greater attention to—and engagement on—these issues is important, the development of new regulatory regimes across APAC has created challenges for multinational FIs and regulators, and could hinder the growth of the financial services and fintech industries within the region. We reviewed the cybersecurity requirements impacting the financial industry in five key jurisdictions, including the largest regional financial centers and consumer markets in APAC: Singapore, Hong Kong, Japan, China, and India. Through a combination of open-source research and on-the-ground interviews—with regulators; local, regional, and global FIs; policymakers; technology experts; and academics—we sought to understand the range of requirements and approaches from different regulators across the APAC region, and the ways in which they impact cyber risks to the regional financial system. Harmonizing regulators’ approaches to cybersecurity regulation in the region could help reduce systemic risks, improve regulatory efficiency, and make it easier for FIs across APAC to grow. This will not be easy and will require sustained engagement on multiple levels. Cyber threats are a transnational issue and will require a transnational response, particularly in highly integrated regions like APAC. Strengthening the security and resiliency of financial networks across the region will require looking at FIs from an enterprise perspective and understanding the cyber risks they face from the perspective of defenders, not the narrow lens of national borders. This will require principles-based approaches that allow for the wide range of business models and capacities of FIs and regulators across the region, and consolidated auditing, examination, and testing procedures to ensure that regulators have an accurate picture of the risks and controls at institutions under their care. Ultimately, regulators’ goals must be to ensure that strong security and resilience, not redundant compliance, is the focus for FIs.
Topic:
Security, Cybersecurity, and Financial Markets
Political Geography:
Global Focus

6. 3 Reasons Why the Fed Wants to Keep Raising Interest Rates

Author:
Martin S. Feldstein
Publication Date:
02-2019
Content Type:
Commentary and Analysis
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
Earlier this month, the Federal Reserve’s policy-setting Federal Open Market Committee voted unanimously to increase the short-term interest rate by a quarter of a percentage point, taking it from 2.25% to 2.5%. This was the fourth increase in 12 months, a sequence that had been projected a year ago, and the FOMC members also indicated that there would be two more quarter-point increases in 2019. The announcement soon met with widespread disapproval.
Topic:
International Affairs and Financial Markets
Political Geography:
Global Focus

7. Emerging Countries in Global Financial Standard Setting: Explaining Relative Resilience and Its Implications

Author:
Andrew Walter
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation (CIGI)
Abstract:
This special report explores the role of emerging-country members in the Basel process, a key aspect of global financial standard setting. It argues that this process has been significantly more politically resilient than adjacent aspects of global economic governance, in part because major emerging countries have perceived continuing “intra-club” benefits from participation within it. Most important among these are learning benefits for key actors within these countries, including incumbent political leaders. Although some emerging countries perceive growing influence over the international financial standard-setting process, many implicitly accept limited influence in return for learning benefits, which are valuable because of the complexity of contemporary financial systems and the sustained policy challenges it creates for advanced and emerging countries alike. The importance of learning benefits also differentiates the Basel process from other international economic organizations in which agenda control and influence over outcomes are more important for emerging-country governments. This helps to explain the relative resilience of the Basel process in the context of continued influence asymmetries and the wider fragmentation of global economic governance. The report also considers some reforms that could further improve the position of emerging countries in the process and bolster its perceived legitimacy among them.
Topic:
International Trade and Finance, Financial Markets, Global Political Economy, and Emerging States
Political Geography:
Africa, Europe, Asia, South America, Australia, North America, and Global Focus

8. From Silicon Valley to Shenzhen: Dollar Exposures in Chinese Fintech

Author:
Michael B Greenwald
Publication Date:
12-2018
Content Type:
Commentary and Analysis
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
In the post-9/11 era, Washington has waged innovative campaigns against terrorism finance, sanctions evasion, and money laundering. Leveraging America’s heavyweight status in the international financial system, the United States Treasury has isolated and bankrupted rogue regimes, global terrorists, and their enablers. As financial technology transforms global business, the traditional financial system faces new competition across a suite of offerings, ranging from brokerage services to peer to peer lending. In no area is this clearer than in mobile payments, where a global hegemon lies ready to exercise its weight, and it is not the United States
Topic:
International Relations, International Affairs, and Financial Markets
Political Geography:
Global Focus

9. Financial Market Integration and Income Inequality

Author:
Jae Wook Jung and Kyunghun Kim
Publication Date:
07-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets. The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality? We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled. We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.
Topic:
Development, Income Inequality, Financial Markets, Economic Growth, and Integration
Political Geography:
Global Focus

10. The Labor Market Effects of Refugee Waves: Reconciling Conflicting Results

Author:
Michael Clemens and Jennifer Hunt
Publication Date:
05-2017
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
An influential strand of research has tested for the effects of immigration on natives’ wages and employment using exogenous refugee supply shocks as natural experiments. Several studies have reached conflicting conclusions about the effects of noted refugee waves such as the Mariel Boatlift in Miami and post-Soviet refugees to Israel. We show that conflicting findings on the effects of the Mariel Boatlift can be explained by a sudden change in the race composition of the Current Population Survey extracts in 1980, specific to Miami but unrelated to the Boatlift. We also show that conflicting findings on the labor market effects of other important refugee waves can be produced by spurious correlation between the instrument and the endogenous variable introduced by applying a common divisor to both. As a whole, the evidence from refugee waves reinforces the existing consensus that the impact of immigration on average native-born workers is small, and fails to substantiate claims of large detrimental impacts on workers with less than high school.
Topic:
Refugee Issues, Financial Markets, and Global Political Economy
Political Geography:
Global Focus