Western diplomacy and state access to capital

What determines government access to capital? Conventional explanations of state credit access rest on tenuous assumptions and fail to fully elucidate market behavior seen in recent years. This article argues that investors evaluate governments based on their diplomatic ties to the West. Specifically, diplomacy with major Western powers serves as a heuristic which signals to market actors that the debtor state is a trustworthy borrower with low default risk. Focusing on in-person diplomacy with the United States, I construct a new data set, the United States Economic Diplomacy (USED) Data, which codes over 5,000 meetings between the US President, US Treasury Secretary, and high-level foreign policymakers from 1990 to 2016. Among a sample of 110 countries, the statistical results uncover evidence of a significant but conditional “Western advantage” in sovereign bond markets. Greater diplomatic ties to the United States are associated with higher volumes of bond issuance. This advantage, however, manifests itself primarily when global capital is scarce and reverses as lower global interest rates incentivize greater risk-taking among investors.