A warning to politicians: bad news is costly

By Kim Bogachuk

ROME, March 1 – It is political news, more so than economic news, that causes volatility in the bond markets of emerging economies, Dr. Lauren Phillips said at a political discussion hosted at John Cabot University on Monday night.

Dr. Phillips, who recently received her Ph.D. from the London School of Economics, presented her ideas in a forum called “The Price of Politics: Political News and Financial Market Volatility in Emerging Market Democracies”. 

Unlike economic news, political news tends to have be of a more questionable nature; it is difficult to quantify, and is highly discretionary, Phillips said. When news about new government policy or election results are made public, uncertainty and instability are the usual results, causing the bond market to react, she added.

Why is this important? The bond market is highly correlated with a country’s economics affairs.And a country's bond rating is measure of how it can pay back its debts. When a government wishes to invest in a project, they have the option of selling bonds to raise the money needed, and repay the investors at a later date.The worse a bond rating, the more money a country has to pay back over time.

This is felt particularly hard in  in emerging markets where investors have reason to be skeptical about a government’s ability to repay its debts. Emerging economies are prone to financial crises and pose the risk of defaulting on their loans. Thus, surprising political news could end up costing a developing world country.

This uncertainty was seen in the bond markets of Brazil and Mexico between 1991 and 2002, Dr. Phillips said. Political news at the time in this region had a negative impact on the local bond markets. Since political news is released unexpectedly, investors were quick to react. Economic news, conversely, was more routine, and did not have such a drastic impact on the market.

 

Dr. Phillips concluded that political news was a significant determinant of daily bond market fluctuations, a helpful tip for both investors and politicians.