The Financialization of Sovereign Debt: A Cross-National Analysis of 23 OECD Countries

Although in the context of financial liberalization the intersecting and reciprocal relationship between financial markets and sovereign indebtedness has often been mentioned by scholars of both, international as well as comparative political economy, no detailed investigation of the financialization of sovereign debt has yet emerged. This is especially puzzling since the sovereign debt market is a “most likely locus of financial market influence” on government policies (Mosley 2004). By defining the financialization of sovereign debt as the process through which governments adopt business practices of financial market actors in sovereign debt management, this paper provides the first systematic cross-national and longitudinal analysis of this trend. From the literature on financialization of the economy and of (mostly) economic studies on public debt management, we deduce a set of ten indicators which measure the use of market-oriented debt instruments and the adoption of risk management techniques in sovereign debt management. Combining quantitative data on the use of instruments with case-specific knowledge on the timing and sequence of reforms we are able to detect a gradual process of convergence. We suggest that this process of convergence can be conceived of as triggered by emulation, with private investment banks, pioneer countries and international organizations being the major transmitters. Finally, this paper not only provides a concept and empirical analysis of financialization, we also reflect what financialization of sovereign debt implies for the dynamics between governments and (financial) markets and point to the challenges posed to democratic capitalism.