We examine how the quality of government institutions affects the likelihood of sovereign default. We find both economically and statistically significant adverse effects of country governance indicators on sovereign credit default swap spreads. The evidence suggests that better-quality governance enhances a country’s willingness to repay debt, and hence reduces the probability of sovereign default. The results still hold after we account for potential endogeneity and conduct a number of robustness tests.
Journal of International Money and Finance, Volume 87, Pages 82-95