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Economic Transparency Means A Creditworthy Sovereign

Sovereign economic transparency is the extent to which authorities provide timely, reliable and accessible information relating to fiscal and monetary policies and the general economy.

In a recent research paper, Eaton Vance Management explores the relationship between Economic Transparency and Yield Spreads, Credit Ratings, Stock Price Volatility and Trust in Government across 130 countries.

Marshall L. Stocker, Director of Country Research Portfolio Manager at Eaton Vance notes in the paper: “We find that greater economic transparency correlates with lower sovereign Yield Spreads and better Credit Ratings. The empirical results are compelling evidence to support our continued efforts to engage sovereign issuers and recommend greater Economic Transparency.

“Conversely, we find that greater Economic Transparency does not correlate to greater volatility in a country’s capital market, as measured by stock price volatility. The trust in Government that a nation’s citizens report is also not correlated to Economic Transparency.

“Altogether, our research demonstrates that both investors and sovereigns benefit from improved Economic Transparency, a “win-win” outcome for ESG engagement.”

The paper cites “Countries that have experienced financial stress frequently lacked the amount of publicly available data that financially healthier nations readily provide. A reliable example is Argentina, which has defaulted nine times since the county was founded in 1816.

“Over a year before Argentina’s 2014 default, the International Monetary Fund (IMF) (2013) censured the country for not providing accurate data on inflation and economic growth.

“Yet, as early as Argentina’s first sovereign default in 1890, off-balance sheet government liabilities existed, which contributed to the default. In that seminal default, the issuance of commercial bank bonds had been permissioned so long as they were backed by government gold bonds. The financial innovation “constituted a new liability on the government’s balance sheet” (Mitchener & Weidenmier, 2008), one which exceeded more than £30 million. As context, Argentina’s 1890 default was £48 million in size.

“While a deterioration in the terms of trade and asset-liability duration mismatch were principal causes of the default, Ford (1956) noted that “he [the investor] was grossly misled by the Argentine government which because of its difficult budgetary position continued to borrow abroad merely to pay off existing service charges in the easiest immediate way”, suggesting transparency issues beset Argentina since its first sovereign default. Recognizing the importance of economic transparency, multilateral financial institutions, including the IMF and World Bank, have encouraged authorities to increase their levels of transparency (International Monetary Fund, n.d.; The World Bank, 2020).

“This stems from the understanding that transparency allows for the public to monitor and hold the authorities accountable (Cukierman, 2001). Further, this trend toward greater transparency can also be understood as “part of a broader trend … to make government more responsive to the public” (Dincer & Eichengreen, 2014).”

Mr Stocker says: “ We have begun using the findings presented in this research as the basis of our engagement with policymakers. We believe policymakers will be interested in knowing how to lower their borrowing costs and improve their Credit Ratings by pursing greater Economic Transparency.”

For a copy of the research paper please contact

About Eaton Vance

Eaton Vance provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through principal investment affiliates Eaton Vance Management, Parametric, Atlanta Capital and Calvert, the Company offers a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures. As of 31 October 2020, Eaton Vance had consolidated assets under management of $515.7 billion. Exemplary service, timely innovation and attractive returns across market cycles have been hallmarks of Eaton Vance since 1924.

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