The Enemy of My Banker Is My Friend?

• In Event: Politics of Sovereign Debt and International Finance

Abstract

Governments around the world are facing the possibility of debt trouble following years of debt-fueled fiscal expansion in the wake of the covid crisis. Several governments have already begun debt restructuring discussions with creditors, and dozens more may be forced to do so soon. Yet, the composition of country creditors has evolved over the past two decades, most noticeably with the rise of China as a major bilateral lender. In this paper, we investigate how office-motivated politicians may respond to private market debt pressure when presented with the potential for an outside lending option. More precisely, we integrate new data on country exposure to Chinese debt for approximately 100 countries from the past 20 years to document that – at least until very recently – Chinese lending has provided states with additional fiscal space to help evade pressures to restructure their private loans. We demonstrate that private sector debt restructuring has been less likely to occur for states with heavier debt burdens to China; this effect is of opposite sign to the traditional effect that more indebted states are more likely to restructure. We also investigate how this outside option is refracted through domestic political institutions, and find that this effect of additional fiscal space from Chinese debt is most pronounced in more democratic states.

Authors

• Cameron Ballard-Rosa, University of North Carolina, Chapel Hill

• Layna Mosley, Princeton University

• B. Peter Rosendorff, New York University