Four essays on conflicts of interest in sovereign debt management

Abstract

Since the early 1980s an increasing share of countries have been experiencing a wave of reforms overhauling the scope and organisation of sovereign debt management. Guaranteeing independence from the political cycle, governments have been outsourcing the debt management task to specialised executive agencies operating at varying arm’s-length – i.e. debt management units (DMUs). In parallel, easing their access to global capital markets, governments have been establishing a primary dealer system. Via self-enforcing arrangements (‘dealerships’), DMUs have been appointing a restricted club of national and international financial institutions (the ‘dealers’) to actively participate in government debt securities auctions and/or foster secondary market liquidity.

Stemming from such institutional developments, this doctoral dissertation identifies and manages conflicts of interest arising from the DMU-dealer principal-agent relationship. Its overarching purpose is to design solutions assisting monitoring and eventual regulatory interventions curbing the risk of negative externalities. To this end, the thesis examines the interplay between government and financial markets drawing on a theoretical framework. It then focuses on the DMU-dealer professional exchange (i.e. the revolving door phenomenon) as a mechanism channelling diverse pathologies and exacerbating the risk of conflicts of interest.

The dissertation’s main argument is that due to the state’s increasing dependence on global financial markets, the institutional setting framing modern government debt management bears the risk of public-private collusion. Although this practice would guarantee the government ongoing access to capital markets, the argument is that it would come at the cost of negative externalities generating financial losses for taxpayers.

Developing this argument, the thesis articulates in four essays describing, first, how the dealership would host institutional room for collusion, to then examine the revolving door as a propagation channel exacerbating such risk. Addressing the identified issues, the regulatory approach aims at preserving both the partnership’s synergies and the value-creating effects of the revolving door.

Drawing on inductive reasoning, this dissertation’s overarching purpose is to provide policymakers with solutions for effectively identifying and managing the risk of conflicts of interest inherent in long-term public-private relationships and in the revolving door phenomenon. Casting light on idiosyncrasies in the institutional setting framing sovereign debt management, the doctoral thesis aims at steering policymakers towards the establishment of a sustainable partnership with the financial industry. An issue of timely importance as the global economy is experiencing a wave of overlapping crises which have triggered an increase in government borrowing needs.