The Geopolitics of Sovereign Borrowing

Countries with lower creditworthiness should have more difficulty borrowing. However, extensive empirical records demonstrate that countries still lend to former 'defaulter' states or countries with low sovereign credit ratings. Even governments with the lowest creditworthiness have some agency in choosing where to borrow from. Leveraging the novel World Bank IDS dataset, this paper fills an important gap within the sovereign debt literature by presenting the first systematic evidence on how geopolitics affect sovereign borrowing decisions. The results of this paper confirmed the positive effect of alliances on access to credit, identified preliminary proof for the existence of vote-buying practices, and rejected the positive effect of geopolitical proximity on access to credit. More specifically, it was found that debtor countries that have an alliance with the creditor country are more likely to receive disbursement, independent of changes in voting similarity, geopolitical proximity between the country pair, level of democracy, fluctuations in the US treasury rate, and the effect of an FTA between the two countries.