The politics of joint sovereign borrowing: the Venezuelan/Argentine Bono del Sur

This article investigates how credible commitment evolves when sovereign states borrow jointly. In 2006, Venezuela and Argentina issued a package of ‘joint’ sovereign bonds, which were later tradable separately. Despite the fact that Venezuela did not explicitly guarantee the Argentine component of the bond, this paper shows through a series of GARCH models that the financial markets have traded the bond on the basis of news about Venezuela's politics, macro economy and its commitment to the bond and other regional integration projects. This is because the bond was embedded in a more extensive set of financial and political relationships between the two countries, and served as a commitment mechanism, enhancing Argentine credibility. The article demonstrates that bilateral economic and political relationships can serve as a credible commitment device in the absence of changes to domestic institutions or longer-term re-establishment of reputation.