610 International Organization TABLE 8.Democracy and sovereign debt ratings Variable n Ⅱ EM EM DEVELOPMENT LEVEL 0.809*** 0.149* 0.874*** 0.250* (29.317 (1.898) (16.296) (1.821) DEMOCRACY 0.031*** 0.011*** 0.027*** -0.000 (9.173) (3.772) (6.974) (-0.006) CURRENT ACCOUNT 0.014** -0.003 0.008 0.005 (-8.014) (-1.074) (1.215) (1.040) DEBT -0.004** -0.003*** -0.002*** -0.004*** (-8.014) (-7.467) (-3.732) (-5.821) GDP GROWTH 0.024*** 0.009*** 0.026*** 0.020*** (3.304) (2.735) (3.071) (4.187) Time dummies Yes Yes Yes Yes Country dummies No Yes No Yes Countries 73 73 7 7 Observations 695 695 705 705 P2 0.70 0.96 0.63 0.90 Note:All regressions are ordinary least squares(OLS)regressions using annual sovereign debt ratings as the depen- dent variable.II Institutional Investor credit ratings;EM Euromoney credit rating score. *p<01,*p<.05,p<.10. of the credibility-improving character of democratic institutions for multinational investors,but is does help one to more clearly examine the causal mechanism. The ex-post/ex-ante bargaining nature of FDI is similar to the dilemma faced by political leaders attempting to obtain loans from foreign lenders.Governments make promises on the repayment of a loan,but once the loan is disbursed,these condi- tions may not be met.There are reputational costs for default,but often the short- run political and economic incentives outweigh these reputation costs.58 Creditors must attempt to predict the potential of default by examining the country's eco- nomic conditions and political institutions along with future world macroeco- nomic conditions. Are democratic governments less likely to renege on foreign debtors?More spe- cifically,are democratic governments less risky debtors in terms of sovereign debt risk?To answer this question,I have constructed a number of empirical tests of the effects of democratic institutions on country risk ratings.9 In Table 8,I present a series of OLS regressions with panel-corrected standard errors that examine the determinants of sovereign debt ratings.For these regres- sions,I use both the Institutional Investor credit ratings and Euromoney as the dependent variables.The Euromoney credit rating scores are constructed by a panel 68.See Rosenthal 1991;and Bulow and Rogoff 1989. 69.For an interesting analysis of the effects of political factors on sovereign debt ratings,see Sobel 1999.of the credibility-improving character of democratic institutions for multinational investors, but is does help one to more clearly examine the causal mechanism+ The ex-post/ex-ante bargaining nature of FDI is similar to the dilemma faced by political leaders attempting to obtain loans from foreign lenders+ Governments make promises on the repayment of a loan, but once the loan is disbursed, these condi￾tions may not be met+ There are reputational costs for default, but often the short￾run political and economic incentives outweigh these reputation costs+ 68 Creditors must attempt to predict the potential of default by examining the country’s eco￾nomic conditions and political institutions along with future world macroeco￾nomic conditions+ Are democratic governments less likely to renege on foreign debtors? More spe￾cifically, are democratic governments less risky debtors in terms of sovereign debt risk? To answer this question, I have constructed a number of empirical tests of the effects of democratic institutions on country risk ratings+ 69 In Table 8, I present a series of OLS regressions with panel-corrected standard errors that examine the determinants of sovereign debt ratings+ For these regres￾sions, I use both the Institutional Investor credit ratings and Euromoney as the dependent variables+ The Euromoney credit rating scores are constructed by a panel 68+ See Rosenthal 1991; and Bulow and Rogoff 1989+ 69+ For an interesting analysis of the effects of political factors on sovereign debt ratings, see Sobel 1999+ TABLE 8. Democracy and sovereign debt ratings Variable II II EM EM development level 0+809*** 0+149* 0+874*** 0+250* ~29+317! ~1+898! ~16+296! ~1+821! democracy 0+031*** 0+011*** 0+027*** 20+000 ~9+173! ~3+772! ~6+974! ~20+006! current account 0+014*** 20+003 0+008 0+005 ~28+014! ~21+074! ~1+215! ~1+040! debt 20+004*** 20+003*** 20+002*** 20+004*** ~28+014! ~27+467! ~23+732! ~25+821! gdp growth 0+024*** 0+009*** 0+026*** 0+020*** ~3+304! ~2+735! ~3+071! ~4+187! Time dummies Yes Yes Yes Yes Country dummies No Yes No Yes Countries 73 73 79 79 Observations 695 695 705 705 R2 0+70 0+96 0+63 0+90 Note: All regressions are ordinary least squares ~OLS! regressions using annual sovereign debt ratings as the depen￾dent variable+ II 5 Institutional Investor credit ratings; EM 5 Euromoney credit rating score+ ***p , +01, **p , +05, *p , +10+ 610 International Organization