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Does political ideology affect a government’s credit rating? The evidence on parties’ socio-cultural positions in European countries

Abstract

Does the political ideology of governments influence credit ratings? Previous studies report that the economic left–right dimension has an impact on credit ratings. However, recent literature shows that there are no significant differences between right-wing and left-wing debt-related policies. In addition, current political developments, such as the rise of populist movements, indicate that the economic left–right dimension may not be sufficient to describe how political ideology affects governments’ actions and thereby credit ratings. Therefore, this paper suggests that the socio-cultural dimension of political ideology or the GAL-TAN (Green–Alternative–Liberal vs. Traditionalist–Authoritarian–Nationalist) also impacts a country’s rating. In particular, the study proposes that TAN-leaning governments are perceived as a risk factor for debt repayment because they are less likely to adhere to rule of law and are reluctant to cooperate with international organizations and other domestic political parties. They also prefer protectionist policies for cultural reasons. Using data from the Chapel Hill Expert Survey for 24 European countries between 1999 and 2019, the results show that governments with TAN-leaning major parties are associated with lower sovereign credit ratings. This study contributes toward a closer understanding of what role day-to-day politics and governments’ political ideology have for the assignment of credit ratings.

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Fig. 1
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Notes

  1. 1.

    This dimension of political ideology has received several different terms in the literature like cultural, new politics libertarian–authoritarian or green–alternative–liberal versus traditionalist–authoritarian–nationalist (GAL-TAN).

  2. 2.

    The impact of political ideology can vary between different aspects of the financial market. For instance, there are mixed effects of left-wing governments on stock prices (Leblang and Mukherjee 2005; Bernhard and Leblang 2006; Frot and Santiso 2013). While Pinto et al. (2010) find that left-wing governments are more likely to be associated with higher stock market capitalization than right-wing counterparts, Sattler (2013) shows that in countries with a low level of institutional constraints, left-wing party electoral victory can lead to a decline in stock prices. According to Bernhard and Leblang (2006), party change after elections has a weak effect on financial asset prices because it does not provide new information to market actors.

  3. 3.

    Although there has been an increasing presence of TAN-leaning parties on the political landscape since the most recent global financial crisis (2007–2008), this is not a new phenomenon. A similar pattern between the lack of predictable institutions and negative credit actions was present long before the recent financial crisis. For instance, in March 1998, a major CRA changed the outlook of Slovak ratings to negative when the populist government led by Vladimir Meciar was expected to win its third term (Mannin 1999). Despite the victory, the coalition of opposition parties managed to create a government. As a consequence of these events, CRAs changed the outlook from negative to stable in December of the same year (Pahre 2006).

  4. 4.

    On the other hand, one could expect that some TAN-leaning governments that are inclined to implement economic policies favored by the market (Paudyn 2014) can compensate for their socio-cultural agenda. However, the impact of the interaction between socio-cultural and economic dimensions of political ideology on credit ratings is statistically negligible, which may indicate that being on economic right does not necessarily on average make TAN-leaning governments more attractive in the eyes of CRAs.

  5. 5.

    The two biggest CRAs: Moody’s and Standard and Poor’s, together control almost 83% of the credit-rating market (Source: The US Securities and Exchange Commission, http://www.sec.gov/news/studies/2012/nrsro-summary-report-2012.pdf; 03 November 2020).

  6. 6.

    However, for the purpose of comparison, Table 10 in “Appendix” presents results for panel data ordered logit regression. The relationship between GAL-TAN and credit ratings remains statistically significant and in the expected direction.

  7. 7.

    One way to assess the reliability of surveys is to look at standard deviations among experts. In the context of the CHES, some studies provide this test (Marks et al. 2007; Hooghe et al. 2010; Bakker et al. 2015) and find that there are small standard deviations for countries across parties. However, there is a stronger disagreement regarding parties that receive a smaller share of votes. This problem is less of a concern for this study as it deals with major parties in government.

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Acknowledgements

I would like to thank Monika Bauhr, Nicholas Charron, Michele Fenzl as well as the editors of Comparative European Studies and the anonymous reviewers for their constructive comments and suggestions on earlier drafts of this article.

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Appendix

Appendix

See Figs. 3, 4 and Tables 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12.

Fig. 3
figure3

Distribution of credit ratings across the sample

Fig. 4
figure4

Changes of GAL-TAN and credit ratings for individual countries over time

Table 2 Control variables
Table 3 Descriptive statistics
Table 4 Transformation of credit rating grades into a numeric scale
Table 5 Countries in the sample
Table 6 Results for the relationship between GAL-TAN and credit ratings for individual countries
Table 7 The probability of downgrade for new and re-elected TAN-leaning/GAL-leaning government
Table 8 Robustness checks for GAL-TAN beta coefficients
Table 9 Relationship between GAL-TAN and credit ratings (with lagged dependent variable, t 1)
Table 10 Relationship between GAL-TAN and credit ratings (ordered logit)
Table 11 Results for the relationship between GAL-TAN and credit ratings without individual countries (country jackknife)
Table 12 Interaction between GAL-TAN and different types of government

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Sychowiec, M. Does political ideology affect a government’s credit rating? The evidence on parties’ socio-cultural positions in European countries. Comp Eur Polit 19, 323–359 (2021). https://doi.org/10.1057/s41295-021-00236-7

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Keywords

  • Ideology
  • Credit rating
  • Populism
  • Sovereign debt