The model introduced in the previous chapter conveys that market discipline works as investors' negative responses to the election of the Left forces left-leaning governments into adopting an economic program closer to markets' preferences than they would otherwise.

It also suggests that market discipline is more effective in “bad times,” when poor economic prospects make investors more reactive to unfavorable policies. In “good times,” conversely, markets' increased complacency widens governments' room to advance a leftist agenda.

In the long run, the model implies that, as capital mobility increases, market discipline should force the convergence of the Left toward the Right in relatively stable economies but not in those that are highly vulnerable to economic fluctuations. In these countries, leftist governments should instead embrace a neoliberal agenda in bad times but promote radical redistribution in good times.

This chapter and the next examine how these claims about investors' and governments' behavior hold in Latin America. Here, I focus on creditors' response to government ideology, and how it varies between good and bad times. In Chapter 4, I turn to governments.

CREDITORS' RESPONSE TO PARTISANSHIP

Does government ideology matter to creditors of sovereign debt? For this to be true, it is necessary that the policies creditors favor (and disfavor) have different prospects of being enacted depending on the ideology prevailing in office.

In the particular case of international bondholders, whose assets are exposed to inflation, currency fluctuations, and the risk of default, returns on investment vary depending not only on governments' macroeconomic decisions, but also on a broader range of supply-side policies that affect their ability to pay debt (Mosley 2003).

It follows that sovereign bondholders should worry about ideology only to the extent that policies advanced by governments of different ideological leanings affect the macroeconomy, as well as creditworthiness, in distinct ways.

Partisan theories suggest they do. They posit that parties promote policies that are consistent with the preferences of their core constituencies, and that governments with different ideological leanings pursue distinct sets of priorities in office (Alesina 1987; Alesina and Rosenthal 1995; Hibbs 1977).