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 of The Monkey Cage 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!

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

  1. Jay Ulfelder August 18, 2011 at 3:13 pm #

    For what looks like a solid review of modeling to predict sovereign debt ratings, see this paper from the World Bank: . As you’ll see, political institutions are pretty much absent from those models.

  2. ScottA August 18, 2011 at 3:29 pm #

    Cantor and Packer 1996 is a good article on the determinants, though it’s a bit dated now – basically they conclude that the big 3 (Moody’s / SaP / Fitch) nearly always agree and determine ratings mainly through 5 macroeconomic factors + default history. Interesting part is that SaP didn’t seem to explicitly take politics into account like this (making 3-5 year projections based almost purely on politics) until now; there also hasn’t been a major divergence in opinion between the two agencies since they were built into the financial-political architecture.

    I think Mike Tomz’s recent book (Reputation and International Cooperation) gets at these ideas in a different way; looks more at debt than ratings, but argues among other things that markets tend to forgive a major financial error if it’s atypical / not really the government’s fault, but don’t forgive a pattern of them. I suppose we could argue that SaP sees a pattern of political self-destructiveness and has decided to incorporate it more substantially into their ratings scheme, while Moody’s sees this as more of an aberration than a new set of norms. I don’t recall any overt shift in methods on SaP’s part, but they must have been moving this way for several years; maybe the Euro-zone fallout has brought political factors more into focus on their main ratings board? Their decision is also odd because it doesn’t mesh with what market actions, which breaks another long-standing trend in the big ratings agencies (they tend to follow what markets already know).

    (that was a long comment – as an excuse: I’m a PhD student in political science / my research is on government debt and public opinion; this is something I think about a lot)

  3. Matthew Shugart August 18, 2011 at 4:59 pm #

    I’d be very cautious about drawing implications for presidentialism, per se, out of the US case. No other presidential system has as institutionalized and “proactive” (i.e. initiating its own policy) a legislative branch as the US. None close, really.

    In general, the discretion available to the executive is vastly greater in presidential than in parliamentary systems. Of course, the latter vary greatly according to single-party majority, minority, and coalition cabinets.

    In fact, David Samuels and I show in our recent book that, at least for one policy area (following through on certain economic-policy campaign commitments), the impact of majority executives is reversed according to presidentialism or parliamentarism. Lacking a majority constrains a PM, but to a large degree liberates a president. Note here that, outside the US, “president without a majority” is not the same as “divided government” is understood by Americans (and Americanists). That is, it almost never means a single opposition party controlling the legislature or one house of it, because most presidential systems have multiparty systems.

  4. Joe Smith August 18, 2011 at 7:18 pm #

    From an OECD report from 2001 (

    “Various studies have shown a strong correlation between the stability and
    cohesiveness of the government and the size of the deficit and the debt to GDP
    ratio. The key finding is that the more fragmented the government, the less able it
    is to assemble a majority in support of the tough measures required to maintain
    fiscal discipline. The most cohesive governments are majoritarian systems in
    which a single party constitutes the government (in the case of parliamentary
    regimes) or controls both the executive and legislative branches (in the case of presidential
    regimes); the weakest are those in which the governing party or coalition lacks
    a majority in parliament.”

  5. qamar afzal January 17, 2012 at 5:59 am #

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