Report by Univ.-Prof. Jonas Bunte, Ph.D.

Government-to-government loans have long been recognized as powerful tools for exerting geopolitical influence. Yet, a puzzle remains: how do creditor governments decide which countries to lend to in an increasingly interconnected world? My co-author Brandon Kinne (University of California, Davis) and I explore this question in our new article, “Strategic Interdependence in Sovereign Lending,” recently published in the European Journal of Political Economy. We wanted to understand whether creditors simply target countries they consider strategically important, or whether their decisions are shaped by the lending actions of other governments.

Our research reveals that creditor governments do not make lending decisions in isolation. Instead, they observe where other governments are sending loans and adjust their strategies accordingly. We show that governments are significantly more likely to lend to countries that are already receiving loans from their political partners, while they tend to avoid lending to countries supported by geopolitical rivals. Rather than directly engaging in lending battles with adversaries, creditors specialize and cooperate within networks of like-minded states, leading to lending patterns that fragment into politically aligned blocs. This suggests that sovereign lending is not only about economics or bilateral diplomacy, but also about navigating a complex geopolitical network.

To test these ideas, we built a dataset of approximately 5,000 bilateral loan agreements between 1990 and 2023, covering over 180 countries worldwide. Using sophisticated network analysis methods, we examined how the presence of loans from other creditors influenced a government’s decision to lend. Our analysis demonstrates a strong “preferential attachment” effect: countries already receiving loans from multiple partners are far more likely to attract new loans. However, this effect is conditional—creditors are much more likely to follow the lending patterns of their allies rather than those of their geopolitical adversaries.

These findings have important policy implications. They help explain why certain countries become focal points of geopolitical competition and why others remain on the sidelines. Understanding these lending networks can shed light on broader geopolitical dynamics, such as why some creditor governments are permitted to establish military installations in loan recipient countries, or how Western responses to China’s Belt and Road Initiative might shape global influence. For policymakers and scholars alike, our study underscores that in today’s interconnected world, financial diplomacy is as much about navigating alliances and rivalries as it is about money.

Sign up for our mailing list for regular updates from the Institute. You can find the subscription form here: Subscribe to the newsletter.