Impact of IMF Programs on Perceived Creditworthiness of Emerging Market Countries : Is There a 'Nixon-Goes-To-China' Effect?

This article examines whether International Monetary Fund (IMF) programs can influence a country's perceived creditworthiness in international financial markets. More specifically, it explores whether the IMF's impact is greater in countries governed by a left-of-center party, in which the Fund's emphasis on market-friendly policies may not chime well with the government's policy orientation. Although such a government may be more reluctant to sign an agreement with the IMF initially, once an agreement has been reached, investors may understand that agreement as signaling motivation to undertake economic reform. In other words, an agreement between a leftist government and the IMF may send a more credible signal to investors than agreements reached with other types of governments. The result is that investors may take the former more seriously, an effect some scholars refer to as the “Nixon-Goes-to-China” effect. Statistical analysis of sovereign credit rating data for almost 90 emerging market countries from 1980 to 2004 suggests that, consistent with the “Nixon-Goes-to-China” hypothesis, IMF programs improve the sovereign ratings of leftist governments but not those of their non-leftist counterparts