COLMENAR VIEJO
INSCRIPCIÓN PROCEDENTE DE MADRID
Let us now further evaluate the question whether implicit state guarantees alone offer a sufficient explanation for lower SOE funding rates. In empirical terms, this question has al- ready been answered in the sense that political considerations have been found to affect debt allocations and costs significantly (Sapienza, 2004; Dinc, 2005). Hence, the purpose of this robustness check is not to refute established results on implicit guarantees but to reconsider their predictions in the light of our data. Many studies have argued that state ownership shields companies from adverse effects during financial crises such as debt constraints and re- ductions in firm value (Borisova and Megginson, 2011; Borisova et al., 2015; Beuselinck et al., 2017). Similarly, Faccio et al. (2006) find that politically connected firms are more likely to be bailed out. What these studies have in common is that they implicitly assume solvency of the respective government because they focus on data from solvent countries or defaults of individual companies in normal economic times. The exceptional situation of public finances in some EU member states during our sample period allows us to analyze the average cost of debt in situations when the governments themselves were cut off from capital markets. This was the case for a total of eight member states who requested financial assistance from
the EU, namely Cyprus, Greece, Hungary, Ireland, Latvia, Portugal, Romania, and Spain.87
During the programs, all countries were under scrutiny from the European Institutions and the International Monetary Fund (IMF). As a consequence, a government’s ability to act independently in case of an SOE default was severely constrained. Moreover, program coun- tries usually had to comply with reform and privatization obligations to bring their budget deficits under control. We argue that in such a situation, implicit state warranties should become irrelevant because investors have lost trust in the government’s ability to service
debt. Figure 5.5.1 plots our dependent variable AV INit for Latvia, Portugal and Spain. If
implicit guarantees are the only explanation for cheaper funding rates, we would expect the difference between the two groups disappear – or become at least much smaller – before the beginning of the respective adjustment programs. Latvia and Portugal requested financial as- sistance in 2011, whereas Spain only did in 2012. Spain and Portugal experienced significant 87Unfortunately, from these countries, Orbis only contains sufficient company ownership data for Latvia, Portugal, and Spain.
Figure 5.5.1: Average interest rates in program countries
Figure 5.5.1 plots the empirical average interest rate AV INitfor Portugal and Spain.
sovereign downgrades from rating agencies prior to and during this period.88 Figure 5.5.1
reveals that Spanish and Latvian average interest rate spreads between the two ownership groups remain roughly parallel over the whole period (left and central panel). Importantly, there is no significant change in the years of the economic adjustment program, a time when the European Institutions scrutinized the Latvian and Spanish governments, and bail-outs of (non-financial) state firms were less likely. In contrast, the Portuguese spread between SOEs and private firms is much lower in 2010-2014 than in previous years. Specifically, the SOE curve approaches the average interest rate of private companies in 2010 and 2011, i.e., im- mediately prior and at the beginning of the adjustment program. This finding indicates that
implicit guarantees have disappeared.89
Table 5.5.3: Country tests
Table 5.5.3 presents tests for differences in means of the dependent variable AV INit for Latvia, Portugal and Spain during their respective economic adjustment programs; *** significant at the 1 percent level; ** significant at the 5 percent level; * significant at the 10 percent level.
Year Mean SOEi= 0 Mean SOEi= 1 Difference T-statistic
Latvia 2011 − 2014 0.0420 0.0587 -0.0167*** -6.01
Portugal 2011 − 2014 0.0499 0.0534 -0.0035 -0.79
Spain 2012 − 2014 0.0407 0.0512 -0.0105*** -6.95
88The rating agency Standard and Poor’s downgraded Portugal from A+ in January 2009 to BB in January 2012 – a downgrade of 2 slots. Spain was downgraded from AA+ in January 2009 to BBB- in October 2012 – also a downgrade of 2 slots.
89It should be noted that the Portuguese curve is based on a smaller sample of 199 firm-years compared to 678 for Latvia and 2,516 for Spain. These numbers deviate from the ones reported in Table 5.2.1 because they include observations with missing values in other control variables.
Table 5.5.3 presents t-tests for differences in means for all three countries during their adjustment programs. We use yearly data, so the time interval for both tests exceeds the actual time interval of the adjustment programs, a fact that allows for a time lag of the effect. Irrespective of government solvency, Latvia and Spain exhibit significantly lower average interest rates for SOEs than for private firms during their respective adjustment programs. We take this as evidence, that implicit state guarantees alone are unlikely to explain funding rates of SOEs in these countries. In Portugal, the difference is not significant during the adjustment program, a fact that instead points to implicit guarantees.
We conclude that implicit guarantees seem a necessary but not sufficient condition to ex- plain cheaper funding rates of SOEs. Preferential allocation of debt could be a complementing explanation for the non-existence of spreads in Latvia and Spain during their adjustment pro- grams: In a period of recession and falling living standards, the perceived positive externality of public ownership may bias fund allocation more strongly than in economically prosperous times. In Portugal, this argument is less convincing, which could point to different institu- tional environments.