Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

Abstract

Research shows that violent and organized crime reduces foreign direct investment and that armed conflict lowers sovereign credit ratings. Building on these insights, I argue that violent crime reduces financial institutions’ confidence in the capacity of governments to repay loans, raising the costs attached to loans, and reducing government debt through a “supply-side” logic. Yet, this logic is difficult to test. Governments can render lenders indifferent to violent crime by accepting higher borrowing costs, resulting in no observed relationship between them. It is for this reason that analysis of the effect of violent crime on government credit ratings alone cannot tell us much about its effect on actual government debt. In this study, I explain how analysis of subnational debt from welfare-minded public banks and profit-minded private lenders can distinguish the supply-side logic from the null hypothesis. Cross-sectional time-series analysis of homicide rates and municipal debt in Mexico demonstrates support for the supply-side logic. Evidence of the supply-side logic reveals that those governments most in need of cost-efficient financing are most likely to be charged higher prices for it or priced out of capital markets altogether, signaling the need for market intervention in these cases.

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Acknowledgements

I am very grateful to Carolina Garriga, Guy Whitten, Vidal Romero, Laura Flamand, and especially two anonymous reviewers for extremely helpful comments and guidance that greatly improved this study. I would also like to express my sincerest thanks to Heidi Jane M. Smith, whose collaboration on previous research on subnational debt in Mexico made this study possible. Previous versions were presented at the Midwest Political Science Association’s annual meetings in Chicago, IL in April 2016 and at ITAM in Mexico City in May 2016. All errors are my own.

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Correspondence to Allyson Lucinda Benton.

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Benton, A.L. Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico. St Comp Int Dev 52, 483–509 (2017). https://doi.org/10.1007/s12116-017-9256-8

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Keywords

  • Criminal violence
  • Armed conflict
  • Sovereign debt
  • Subnational debt
  • Subnational capital markets
  • International capital markets
  • Mexico