Unintended Bankers: U.S. Troop Deployments and Sovereign Credit Ratings
Policy makers have voiced concern that moral hazard played a role in driving financial crises. In the context of the global economy, sovereign countries may have received a credit boost in the form of U.S. support. This support has been observed through various mechanisms for political proximity. One of these has been the deployment of U.S. troops. As troop deployment serves as a major cost to the United States, it serves as a signal to market that the United States maintains a major strategic interest in the well being of a country and that it is willing to provide a bailout. I hypothesize that this spurs sovereign credit rating agencies into assigning more generous sovereign ratings for countries hosting U.S. troops. I find that a one percent increase in U.S. troop deployment increases sovereign credit rating by nearly 14 percent. I also find that hosting U.S troops is correlated with lower bond spreads and lower interest on government securities, which protects against the argument of reverse causality.
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