As to market dynamics, countries that borrow in international capital markets are typically obliged to service their debts in hard currency, such as US dollars. They are accordingly able to borrow at lower interest rates than Exhibit 4 estimates. However, when the same countries float domestic bond issuances, the interest rates are typically much higher.
Opacity contributes to the inability of some countries to borrow in their own currencies.
This generally occurs when governments crowd out private investment through macroeconomic means such as the imposition of below- equilibrium interest rates. The anomaly often indicates the absence of investment opportunities that can compete with government-issued debt. The end cost of such policies is borne by any individual who saves money, yet is unable to obtain the returns that would result from financial systems without government repression. A hidden and involuntary subsidy is thus provided by savers who are often unaware of the disadvantage imposed on their efforts. Investors assume, in effect, a significant hidden surtax when they commit funds to countries burdened with a high O-Factor.