Political risk is a critical factor influencing sovereign debt sustainability, particularly in high-debt economies where fiscal margins are constrained. 

The study "Are Bad Governments a Threat to Sovereign Defaults? The Effects of Political Risk on Debt Sustainability" by Ajovalasit, Consiglio, Pagliardi, and Zenios (2024) builds upon the stochastic Debt Sustainability Analysis (DSA) framework developed by Zenios and Consiglio et al. (2021) to include political risk. 

By extending this model, the authors incorporate International Country Risk Guide (ICRG) ratings into the analysis, allowing for a comprehensive assessment of how governance dynamics shape sovereign debt trajectories.  

Two case studies illustrate these dynamics: 1. Italy 2014–2019 Reforms: Governance reforms improved political ratings, narrowing the debt-to-GDP trajectory and reducing realised debt ratios compared to a scenario without reforms. 2. France 2024 Snap Elections: Snap elections caused a sharp drop in political ratings, widening the debt-to-GDP trajectory and increasing borrowing costs, highlighting the destabilising effects of political shocks. 

The study suggests incorporating political risk into debt management frameworks can minimise refinancing pressures and stabilise debt trajectories, especially in politically volatile environments. 

By implementing governance reforms, preparing for shocks, and optimising debt issuance, governments can mitigate the fiscal impacts of political instability and ensure long-term debt sustainability in an increasingly uncertain global environment.