Government Choices of Debt Instruments

Governments borrow from a range of creditors-commercial banks, sovereign bondholders, official bilateral creditors, and multilateral financial institutions. Sovereigns' creditor portfolios vary significantly across space and time. While creditor portfolios partly reflect supply-side considerations (macroeconomic profiles and associated default risk), they also reflect governments' preferences over fiscal transparency. Governments that prefer to disclose less information about economic outcomes will choose borrowing instruments that are less public, such as private loans from banks (versus bondholders) and official sector borrowing from bilateral (versus multilateral) creditors. Empirical analyses of government debt composition across developing nations confirm these predictions. We also find support for our claims at the subnational level, using data from Mexican municipalities. We treat various types of credit (bilateral lending, multilateral finance, and sovereign bonds) as related, rather than distinct.