Do closer political ties with a global superpower improve sovereign borrowing conditions?

Everything humans create is basically gamed.

Gene Ambrocio and Iftekhar Hasan of Bank of Finland in this paper look at how friends can be bought at world stage for an exchange:

Do closer political ties with the US improve sovereign borrowing conditions? Briefly, our results suggest yes they do. We use United Nations General Assembly voting similarity with the US and US aid flows to approximate the degree of political connection between sovereign states and the US to answer this question. We find that these voting similarity and aid flows are associated with significant improvements in sovereign borrowing conditions in terms of better sovereign credit ratings and lower sovereign bond yields.

Our results provide a mechanism which can explain how votes in the United Nations General Assembly may be bought through the promise of better sovereign borrowing conditions.  These results also provide a novel channel through which global political ties can affect economies.

Nevertheless, we do not study the medium to long-term consequences of these effects. The overall macroeconomic effects may be larger given spillovers of sovereign borrowing conditions to private investment and credit markets (Almeida et al., 2017; Boehmer and Megginson, 1990; Chen et al., 2013; Lyon and King, 2016; John et al., 2016;Ambrocio et al., 2019). Our focus has also been solely on the US as a donor country. Extensions along these lines are areas for future research.


The flow is like this. You support US, US gives aid in return. The US aid then leads to higher sovereign ratings and lower interest rates!

In numbers:

We find a statistically and economically significant effect of closer political ties with the US. First, an  increase of US aid flows of one percent of GDP a year (effectively tripling the average) is associated with 0.2 to 2 notch upgrade in sovereign ratings and 1 .8-5.3 percentage points lower yields. On the other hand a switch from completely voting against to always voting with the US at the UN General Assembly is associated with 0.8 8.2 notch upgrade in sovereign ratings and 1-6 percentage points lower bond yields. Using our political ties index, we find that a one standard deviation improvement in US political ties leads to 0.3 to 5.4 notch upgrade in sovereign ratings and 2.6 (and up to 11) percentage points lower sovereign bond yields.


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