War and Default

Abstract

Sovereign borrowing is often used to cover the costs of war. This borrowing, coupled with war’s economic disruptions, strains states’ ability to honor debt promises. Contrary to conventional expectations, however, we find that default is not common after wars. To explain the relationship between war and sovereign default, this article lays out a selection effect argument: war participants are unlikely to default in the first place, while states likely to default are unable to acquire the financing necessary to fight a war. In sum, states that lack the financial means to adequately borrow avoid paths to war. After offering some examples of the selection mechanism at work, we present evidence that states unlikely to default will avoid entering the war sample. Our findings have implications for the inferences researchers make about war finance and war onset.

Globalization and wartime trade

“…Globalization may make land and other assets more economically valuable in the long term, and worth fighting for at higher short-term costs to trade. If globalization improves access to credit even for governments prone to MIDs as discussed above, they are likelier to select war in a globalized world, since credit is a war essential (Shea and Poast, 2017).…”

Money Talks: Finance, War, and Great Power Politics in the Nineteenth Century

“…More plausibly, only the most creditworthy states can afford war and these same states attract loans. Thus a selection effect drives both wars and loans to be associated with each other (Shea and Poast 2018). Besides selection effects, the other difficulty to examining the general association between finance and war is distinguishing the meaning of nonevents.…”

“…For example, Haggard and Kaufman (2012) examine the role of inequality in democratic transitions. More recently, Shea and Poast (2018) examine whether sovereign default is a by-product of war, particularly losing a war. 2 The CPO method is useful in examining rare events such as war, and can also identify complicated causal processes (Haggard and Kaufman 2012: 5).…”

“…Credit provides economic and political benefits to sovereigns, especially for wars. As a result, the sample of states observed in wars behave differently in the credit market given the importance of credit to war (Shea and Poast 2018). For example, Shea and Poast (2018) demonstrate that states at risk at war will default less to ensure their access to credit if war begins.…”

“…In the illustrative example, finance's signal comes from the decision to lend or not. However, some states are creditworthy enough to secure loans despite the risk of war (Shea and Poast 2018). For these states, the lender may seek ways to offset the risk of lending with higher interest rates, which may also signal to adversarial states.…”