This paper examines the relationship between foreign debt as a percentage of GDP and its correlation with domestic fiscal policy in Latin American economies from 1990 to 2024. Specifically, the paper tests and finds a relationship between debt obligations held by foreign lenders and domestic fiscal austerity measured by government social spending. The paper also tests whether Latin American economies respond to credit ratings given by the World Trade Organization. The paper fails to find a statistically significant relationship here. This failure does not indicate conclusively that Latin American economies do not reference credit ratings. Instead, it may suggest that other channels, such as the debt obligations themselves, are sufficient to move policy in Latin American economies. That notwithstanding, the paper provides empirics that indicate statistically significant relationships between foreign debt holdings and domestic austerity. This follows theories laid out in previous literature, in which developing economies will act in the interest of their future reputation. They do this by paying off foreign debts even when it is politically costly at home. Governments operate in this accordance to keep lines of credit open to future governments, whether the current administrations will be in charge or not.
Trevor Faria (Sun,) studied this question.