Does political ideology affect a government’s credit rating? The evidence on parties’ socio-cultural positions in European countries

Does the political ideology of governments influence credit ratings? Previous studies report that the economic left–right dimension has an impact on credit ratings. However, recent literature shows that there are no significant differences between right-wing and left-wing debt-related policies. In addition, current political developments, such as the rise of populist movements, indicate that the economic left–right dimension may not be sufficient to describe how political ideology affects governments’ actions and thereby credit ratings. Therefore, this paper suggests that the socio-cultural dimension of political ideology or the GAL-TAN (Green–Alternative–Liberal vs. Traditionalist–Authoritarian–Nationalist) also impacts a country’s rating. In particular, the study proposes that TAN-leaning governments are perceived as a risk factor for debt repayment because they are less likely to adhere to rule of law and are reluctant to cooperate with international organizations and other domestic political parties. They also prefer protectionist policies for cultural reasons. Using data from the Chapel Hill Expert Survey for 24 European countries between 1999 and 2019, the results show that governments with TAN-leaning major parties are associated with lower sovereign credit ratings. This study contributes toward a closer understanding of what role day-to-day politics and governments’ political ideology have for the assignment of credit ratings.