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Electoral Rules, Interest Group Pressures, and the Price of Democratic Default

Conventional wisdom dictates that democracies are reliable in upholding their international commitments. However, this assertion is at odds with democratic behavior in sovereign borrowing where democracies have sometimes imposed considerable losses on foreign creditors. Why do some democracies choose to renege on extremely large portions of their sovereign debt during economic crisis? This article argues that costs incurred by creditors are dependent on how the borrowing state's electoral system aggregates competing domestic economic interests. Internationally oriented economic interests prefer to minimize creditor losses since sizeable debt reductions are more likely to compromise access to foreign credit. Conversely, workers and domestic-oriented economic interests prefer to maximize losses faced by foreign creditors in order to ease the costs of austerity at home. By shaping the political incentives of policymakers, I argue that democracies with candidate-centric electoral systems should be associated with sovereign defaults that are less costly for foreign creditors. Under these electoral systems, governments hold incentives to cater primarily to internationally oriented economic interests that are best able to overcome the costs of collective action. Statistical evidence from 53 sovereign debt restructurings between 1978 and 2012 supports the main argument.