The Financial Impact of Populism and Political Shocks: Evidence from Credit Markets and Sovereign Bonds

Abstract

Political shocks have become increasingly salient in recent years, as unexpected electoral outcomes, policy reversals, and institutional changes create widespread uncertainty in financial markets. The rise of populist movements across the world represents a significant form of political shock that has raised critical questions about their economic consequences. While existing literature has examined populism's political dimensions, there remains a gap in understanding how populist movements and broader political shocks affect financial markets and credit allocation. This thesis addresses this research gap by providing empirical evidence on the financial impacts of populism and political shocks across three distinct but related dimensions: national and regional credit markets, sub-national lending patterns, and sovereign bond market reactions.

Difference-in-differences frameworks with two-way fixed effects are employed across all three studies, providing rigorous causal interpretations. The data utilised in these studies are rich and granular across geographical dimensions. Using cross-country Small and Medium-Sized Enterprises (SME) lending data collected from 11 different central banks (2011–2019), Chapter Two examines the impact of the Brexit referendum. The findings show a significant 1.2% (4.8%) quarterly (annual) contraction in lending to SMEs in the UK relative to comparable European countries. Within-country analysis, using postcode-level data, reveals severe loan contractions in rural and peripheral areas, as well as in regions with high EU export proportions, highlighting regional disparities in Brexit's impact on SME lending.

Chapter Three analyses Italy's regional loan markets during the rise of populist parties in the 2018 and 2022 elections, using monthly provincial-level data across different economic sectors and borrower types. The chapter demonstrates that provinces with higher electoral support for far-right populist movements experienced significant declines in lending activity, particularly to SMEs, with these effects intensifying substantially following the 2022 elections. In contrast, left-wing populist support shows either insignificant or occasionally positive effects on lending.

Chapter Four provides the first systematic cross-national analysis, for 36 countries from 1996 to 2024, of how populist electoral victories affect sovereign bond markets. Results suggest that populist electoral shocks generate immediate increases of 4%, on average, in government bond yields. Notably, the analysis reveals ideological asymmetries: right-wing populist electoral success produces more pronounced yield increases, while left-wing populist victories show no statistically significant market effects.

These three chapters collectively show that populism's financial consequences operate through multiple channels across different contexts, with immediate costs emerging through credit contractions and higher borrowing expenses before any policy changes occur. The first two empirical studies examine specific cases—Brexit as a major political shock and Italy's populist rise—while the third study provides broader cross-country evidence. The Brexit analysis reveals geographically uneven effects, with rural and peripheral areas experiencing disproportionate costs, while both Chapter Three on Italy and the cross-national study in Chapter Four uncover ideological differences, with right-wing populism consistently producing stronger financial market responses than left-wing variants.

This thesis advances our understanding of political economy and finance by establishing a framework for how populist movements influence financial markets through uncertainty, policy expectations, and institutional credibility. These results highlight the importance of regionally targeted policies to address the unequal financial burdens of populist movements and help policymakers understand the economic costs of political polarization. The thesis shows that populist electoral outcomes have immediate and enduring effects on financial market stability, revealing the economic consequences of populist politics.

Date of Award	2025
Original language	English
Sponsors	Bangor Business School
Supervisor	Rasha Alsakka (Supervisor) & Noemi Mantovan (Supervisor)