Executive Constraint and Sovereign Debt: Quasi-Experimental Evidence From Argentina During the Baring Crisis

Abstract

The literature on whether executive constraint improves the credibility of sovereign debt takes the political regime as the unit of analysis, typically computing an average yield or price for each regime, and then relating that average to regime characteristics. In this article, we take the individual bond issue as the unit of analysis, examining quasi-experimental evidence from two Argentine sovereign debts issued in the 1880s. The loans were sought by the same government and offered nearly identical terms to borrowers, except that one was funded and the other was unfunded. The loans sold at virtually the same price until the Baring crisis of November 16, 1890 erupted. Thereafter, their price histories diverged markedly. We analyze the market’s evolving valuation of the two loans before and after the Baring crisis using a difference-in-differences estimator and weekly price data. Our study shows that exposure to executive discretion strongly influences market assessments of value.