When it comes to a government borrowing costs, it pays to be functional.
If you’re looking for proof, check out the chart below.
From Callum Thomas, Head of Research at Topdown Charts, it tracks the relationship between perceived national governance and 10-year government bond yields.
According to Thomas, the composite governance ranking includes inputs from the IMF, World Economic Forum, and World Bank, and is designed to give a composite view of how a given country ranks overall governance-wise.
While not the only factor that determines government borrowing costs, ignoring factors such as inflation, central bank policy and current account status, there is a fairly good relationship between how well a country is governed and how much it has to pay.
“With an R-squared of almost 70%, and just visually, you can see there is a decent correlation,” Thomas says.
R-squared, or the coefficient of determination, is used in statistics to predict outcomes or to test hypotheses.
In his opinion, Thomas says the chart reflects two things.
“Firstly, there is bound to be a country risk premium aspect, in that countries with worse governance will probably have a higher risk of default or other possible impairment of capital,” he says.
“Second, countries with worse governance are likely to have more volatile growth, higher interest rates in general and, most importantly, higher inflation.”
For those in the private sector whose interest rate is set off government bond yields, it pays to have a functional government.
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