Sovereign Debt Under Pressure: Political Capacity and the Cost of Borrowing

The pressure on sovereign borrowers raises a question that debt ratios alone cannot answer: does a government have the political capacity to implement its response?

Higher financing costs can require difficult decisions about taxes, spending, subsidies, and investment. Political disagreement can delay those decisions, weaken their credibility, or change their substance. For investors, assessing a government’s financial position therefore also means examining the institutions and political conditions through which adjustment must occur.

September’s International Country Risk Guide ratings bring these questions into focus as we prepare to publish October’s data. The readings reveal notable differences among advanced economies, including a comparatively sharp deterioration in the United States and an uneven French profile. Recent research using ICRG data helps explain why these differences matter for sovereign markets.

The United States: political deterioration alongside market resilience

The United States’ overall political-risk rating fell from 72.5 in August to 71 in September. Its 1.5-point decline, matched by Brazil, was the largest monthly deterioration among the 141 countries in Table 3B. Higher ICRG scores indicate lower risk.

The underlying American profile deserves attention. Investment Profile stands at 9.5 out of 12, while Government Stability is 6 out of 12, Democratic Accountability is 4 out of 6, and Bureaucracy Quality is 3 out of 4.

These scores describe an environment in which comparatively strong investment conditions coexist with political and institutional vulnerabilities. They do not establish which components caused September’s decline: Table 3B provides the previous month’s overall rating, rather than a complete history of each component.

Nor does political deterioration necessarily produce an immediate selloff in government bonds. Reuters reported defensive Treasury buying on October 15, alongside changing expectations about Federal Reserve policy. Investors can seek the liquidity and relative safety of Treasuries while remaining concerned about the American political environment. 

The distinction has empirical support. The IMF’s April 2025 Global Financial Stability Report finds that long-term government-bond yields in traditional safe-haven countries tend to fall following major geopolitical risk events. The study’s safe-haven group includes the United States, Germany, Japan, Switzerland, and the United Kingdom.

Consequently, a Treasury rally cannot, by itself, settle the question of political risk. Bond prices also reflect monetary-policy expectations, liquidity, and the alternatives available to investors.

France: the capacity to implement difficult choices

France’s September political-risk rating declined half a point to 74.5. Its Government Stability score of 5 out of 12 sits alongside Investment Profile of 10.5 out of 12, Democratic Accountability of 6 out of 6, and Bureaucracy Quality of 3.5 out of 4.

That combination offers a more useful starting point than a broad claim of institutional collapse. France retains substantial institutional strengths, while its government faces constraints on its ability to implement policy.

The distinction is relevant to recent market concerns about France’s budget and the political feasibility of fiscal consolidation. Investors must judge both the proposed financial adjustment and the likelihood that it can survive the legislative process and public opposition. 

ICRG’s Government Stability assessment considers government cohesion, legislative strength, and popular support. These dimensions help frame the implementation question. They do not replace an examination of debt maturities, interest costs, growth, or the budget balance, but they provide information about the political environment in which those financial pressures must be managed.

Germany and Italy complicate familiar assumptions

Germany provides an important qualification. Its Government Stability score is also 5 out of 12, although its overall political-risk rating is higher than France’s, at 77.5.

It would therefore be incorrect to explain France’s borrowing premium over Germany solely through the Government Stability component. Their broader political profiles differ, as do their fiscal positions, financing conditions, and roles within European markets.

Italy offers another revealing comparison. Its September political-risk rating of 79 exceeds those of both France and Germany. Its Government Stability score is also higher, at 6.5 out of 12, and its overall rating was unchanged during the month.

This does not mean Italian sovereign debt is safer overall or should trade at a lower yield. Political risk is one part of sovereign credit analysis. The comparison does demonstrate why familiar distinctions between European “core” and “periphery” countries can obscure differences in current political conditions.

What recent research using ICRG adds

The academic and policy literature provides mechanisms through which these political differences can become financially consequential.

In Tax Revolts and Sovereign Defaults, a June 2025 Inter-American Development Bank working paper, Fernando Arce, Jan Morgan, and Nicolas Werquin use ICRG data to examine the relationship between political risk and sovereign CDS spreads. Their cross-country analysis finds that the association persists after controlling for macroeconomic fundamentals and country and time effects.

Their quantitative model, calibrated to Argentina, examines how taxation, protests, political turnover, and sovereign default interact. The relevant lesson is that a fiscal decision can alter the political conditions governing its implementation. Those political responses can, in turn, affect lenders’ expectations about future policy and repayment. The Argentina-specific results should not be treated as estimates for France or the United States. 

The IMF’s April 2025 analysis addresses a complementary issue: how domestic resilience shapes the transmission of foreign geopolitical shocks. It measures institutional quality using five ICRG components—Bureaucracy Quality, Corruption, Democratic Accountability, Investment Profile, and Law and Order.

The analysis finds larger sovereign-risk effects from foreign geopolitical events where institutional quality and financial buffers are weaker. This suggests that assessing exposure to conflict or trade disruption requires examining the capacity of the affected country to absorb the shock. The IMF work is published policy research; the IDB study is a working paper.

An earlier peer-reviewed contribution remains useful for interpreting both findings. In Political Risk Spreads, published in the Journal of International Business Studies in 2014, Geert Bekaert, Campbell Harvey, Christian Lundblad, and Stephan Siegel use ICRG ratings to identify the political-risk component of sovereign spreads while accounting for global conditions, domestic economic factors, and liquidity.

Their framework reinforces an essential distinction: observed sovereign spreads contain several sources of risk. Political analysis is most useful when it helps identify those sources rather than attributing every market movement to politics. 

What to watch as October’s data approach

September’s readings also show why investors should distinguish a country’s risk level from its direction of travel. Japan improved one point to 77.5, while Ghana registered the largest monthly gain in Table 3B, rising two points to 68. An improving country can remain relatively risky, just as a stronger country can deteriorate.

As we prepare to publish October’s ICRG data, the question is whether September’s changes persist, stabilize, or reverse. For the United States, the scale of the monthly decline warrants follow-up. For France, the relationship between political constraints and institutional resilience remains central. Across countries, changes in individual components will help clarify whether shifts in overall ratings reflect government stability, investment conditions, conflict exposure, or other pressures.

September’s table does not demonstrate that ICRG predicted October’s bond movements, and it cannot establish their causes. It does identify political conditions that investors should examine alongside fiscal and market evidence.

The investment question is how those conditions affect a government’s ability to respond when financing becomes more difficult. A credible adjustment requires both a workable financial plan and the political capacity to carry it through.

Data note: Country scores and monthly changes are from The PRS Group’s ICRG Table 3B, September 2026, relative to August. Higher scores indicate lower risk. Political-risk ratings are distinct from sovereign credit ratings and do not measure default probability directly. Country interpretations in this update are applications of the research frameworks discussed, rather than country-specific findings from those studies.