Sovereign Credit and the Fate of Leaders: Reassessing the “Democratic Advantage”

In this article, we contend that the “democratic advantage” literature (i) exaggerates the potential political backlash from credit downgrades in democracies; and (ii) overlooks the importance of sovereign credit to nondemocratic leaders. We argue that nondemocratic regimes receive a higher marginal political benefit from credit compared to democratic regimes. Consequently, changes in credit prices or credit access affect nondemocratic leaders' tenure more than democratic leaders' tenure. To test this argument, we provide the first statistical examination of the electoral punishment mechanism of the “democratic advantage.” Our duration analysis shows that credit downgrades increase nondemocratic leaders' vulnerability more than that of their democratic peers. Our research reinforces the growing concerns about the conventional views about regime type, domestic constraints, and leaders' preferences toward sovereign credit and other political processes.