Presidential vs. Parliamentary Systems, Responsiveness to Public Opinion, and Financial Markets

In response to my post last week regarding the empirical link between parliamentary systems of government and AAA sovereign debt ratings, Monkey Cage reader and Temple University professor Christopher Wlezien sent along the following comment:

This is interesting Josh. It also may relate to what Stuart Soroka and I argue (and sort of show) in our book Degrees of Democracy and demonstrate more reliably in our most recent paper: that Madisonian presidential systems are more responsive to changing public opinion. That is, it may be that, in being more responsive to the public, these presidential systems are less responsive to the demands of financial authorities? Or, put differently, governments in parliamentary systems have greater discretion. There is reason to think that electoral system and party polarization will matter too, the idea here being that the level of fragmentation and division may influence what ratings agencies think about prospects for agreement. Just a thought (or two). Let me know what you think.

Fareed Zakaria at CNN also weighed in with some possible explanations for this finding:

There are, of course, advantages to the American system – the checks and balances have been very useful on occasion. But we’re living in a world where you need governments that are able to respond decisively and quickly. In a fast-moving world, paralysis is dangerous. Other countries are catching up – if not overtaking – America.

Debt crises across the West make this a particularly bad time for paralysis. Western countries have all built up very large pension and healthcare obligations that lead to huge amounts of debt. They need to figure out some systematic way to work that debt load down to a much more manageable level. This means a lot of pain.

Given this situation, it becomes very easy in a presidential system for the executive and the legislature to get into a classic standoff over benefits as we saw in the debt crisis.

Remember, the political battle surrounding the debt ceiling is actually impossible in a parliamentary system because the executive controls the legislature. There could not be a public spectacle of the two branches of government squabbling and holding the country hostage.

Zakaria neatly spells out the insight that led me to look at the data in this way in the first place, while Wlezien’s (and Soroka’s) approach is something I had not thought about before. But both lead in a similar direction: if S&P is sincere in its claim that politics figures into debt ratings (and that this was not just an ad hoc justification following the illumination of the fact that it made a $2 trillion error in its original calculations), we should be able to find some sort of a relationship in the data between political factors—like presidential vs. parliamentary systems of government, but perhaps also including things like degree party system polarization, electoral volatility, etc.—and sovereign debt ratings. Wlezien and I went back and forth a couple times about this, and one of the things we discussed was the possibility of detecting some sort of time-sensitive effect in this regard, if S&P had at some point publically announced that it was going to start weighting political factors more heavily.

The question I want to throw out to readers now is whether there is any sort of literature out there that empirically analyzes the determinants of sovereign debt ratings? I’m sure there must be some sort of literature out there in the finance world on this topic, but I wonder how much this incorporates political as opposed to economic factors. And does anyone know if S&P (or the other agencies) ever made a conscientious (and explicit?) decision to start weighting political factors more heavily in rating sovereign debt in the past, or was the announcement regarding the US decision the first time something like this was discussed? Any suggestions would be most appreciated, and of course feel free to discuss your own work as well if applicable!

[Cross-posted at The Monkey Cage]

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Joshua Tucker

Joshua Tucker is a Professor of Politics at New York University.