Book Review of Julia Gray. 2013. The Company States Keep: International Economic Organizations and Investor Perceptions (New York: Cambridge University Press).
The Review of International Organizations, April 2014
4 Pages Posted: 20 Apr 2014
Date Written: April 10, 2014
This excellent book is about the impact of membership in international economic organizations (IEOs) on sovereign credit risk. Gray’s key intuition is that membership changes in organizations like the European Union (EU) and Mercosur are public events; therefore, when the professional investment community observes such changes, they reassess the creditworthiness of sovereign borrowers. When, for example, a high risk country joins an organization composed primarily of low risk members, the entrant will be viewed more favorably by the investment community. In Gray’s terms, the entrant has joined a more prestigious “peer group” and is rewarded for this status upgrade with a lower interest rate. By the same token, the existing members of the organization, having added a riskier member into their ranks, will see an increase in their costs of borrowing, as investors sense that the peer group has been “diluted” by the new member. Sovereign credit risk is thus affected by “The Company States Keep.”
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