The effects of fiscal opacity on sovereign credit spreads

Using the Open Budget Index of 45 advanced and emerging countries and their sovereign credit default swap (CDS) spreads, we find evidence that the sovereign credit market differentiates countries with higher fiscal opacity than others, by way of an opacity premium. We further show that the premium is levied on the entire credit spread term structure but not uniformly over the range of the opacity measure and across countries. While we identify market disciplinary effects on fiscal opacity, it does not replace the need for efforts to set global standards and promote compliance.