Strategic interdependence in sovereign lending

Abstract

Government-to-government loans are powerful instruments of influence, but how do creditor governments decide whom to lend to? We argue that these decisions are shaped by the lending behavior of third-party creditors, as governments strategically allocate loans to maximize their geopolitical influence. Specifically, creditors observe and respond to third-party lending patterns, using these signals to guide their own choices. Crucially, the identity of these third-party creditors matters: rather than engaging directly with rivals, creditors tend to specialize and cooperate within their partnerships. We introduce and empirically test network effects in sovereign lending, showing that lending follows a pattern of conditional preferential attachment. Creditors are more likely to extend loans to recipients supported by their political partners than to recipients supported by adversaries. Consequently, although lending competition is not easily visible in aggregate data, lending patterns reveal a fragmentation into politically aligned creditor blocs. Our inferential network models provide strong evidence of this dynamic, demonstrating that governments’ perceptions of a recipient’s strategic value are shaped by the actions of other lenders. By incorporating this strategic interdependence, our analysis significantly improves the prediction of which governments receive loans and from whom.