Working Paper: NBER ID: w15128
Authors: Marc Flandreau; Juan H. Flores; Norbert Gaillard; Sebastian Nietoparra
Abstract: We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market.
Keywords: Sovereign Debt; Underwriters; Rating Agencies; Market Quality
JEL Codes: F34; G14; G15; N00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Underwriters as gatekeepers (G24) | Reduced risk of defaults (G33) |
| Rise of rating agencies (G24) | Loss of certifying role of underwriters (G24) |
| Loss of certifying role of underwriters (G24) | Riskier practices among underwriters (G22) |
| Riskier practices among underwriters (G22) | Market for lemons (L15) |
| Underwriter identity (G22) | Default rates (E43) |
| Underwriters historically acted as gatekeepers (G24) | Reputation impacted likelihood of defaults (G33) |
| Outsourcing of certification to rating agencies (G24) | Increased riskier debt issuance (F65) |