Political Institutions and Sovereign Borrowing: Evidence from Nineteenth-Century Argentina

I analyze the relationship between political institutions and sovereign borrowing in a simple model where institutions are endogenous and governments vary in their credit risk and politi-cal goals. The model demonstrates that there is an inverse relationship between institutional constraints and the cost of borrowing, which is consistent with the North-Weingast thesis. The model also explains why previous empirical studies on this subject, which rely mostly on observational data to make casual inferences, have reached disparate conclusions. I use extensive data on the risk premia of Argentine bonds in the nineteenth-century to evaluate the model’s central implications. My analysis indicates that the adoption of constitutional constraints in the 1850s led to a considerable drop in Argentina’s cost of borrowing. I also use the value of Argentina’s public debt issued in international and domestic markets to examine how credibility affects borrowing costs when rulers are responsive to some creditors but not others (i.e. institutions are exogenous). The findings indicate that when the coun-try’s perceived creditworthiness deteriorated, the only creditors who demanded a higher risk premia where those with no significant influence over the authorities. In contrast, changes in the country’s perceived risk failed to have any effect on the interest rates charged by influential lenders