The rise of the far right has been a defining feature of political systems in developed democracies over the past two decades. In recent research, Alison Johnston and Juliet Johnson demonstrate that domestic bond investors have become an important constraint on populist governments and their access to capital.
Far-right populist parties were once politically marginalized actors, but over the last decade they have entered governments with greater frequency. On rare occasions, populists have even assumed full control over governments without the constraint of sharing power with a more mainstream political party. Such empowered far-right governments have ruled in Hungary under Viktor Orbán (2010-2026), in Poland under the Law and Justice Party (2015-2023), and in Italy under the Lega/5 Star Movement coalition (2018-2019). The second administration of United States President Donald Trump fits this category as well, as Trump’s far-right and increasingly authoritarian cabinet has faced little pushback from mainstream Republicans. Democracy scholars frequently highlight how unchecked far-right parties have used their power to dismantle judicial independence, undermine civil liberties, and actively weaken their political opposition.
However, as our research further investigates, the far right has proven far less effective in bending bond markets to their will, especially in the case of domestic investors. The bond market imposes a powerful economic constraint upon governments that few political checks and balances can rival. Put simply, bond investors decide at what costs governments can borrow or whether they are able to borrow at all. Far-right parties frequently support policies such as trade protectionism and financial nationalism, which run counter to market liberalism and may be viewed negatively by investors. Hence, once in office, “bond vigilantes” aiming to punish populist governments can pass judgement on these policies by jeopardizing far-right governments’ capabilities to finance them.
Prior research has documented that right-wing parties typically enjoy a privileged borrowing position, including lower interest rates and more stable exchange rates, when compared to leftist cabinets. However, this pattern falls off in the face of extreme populist parties, which increase financing costs by introducing political instability and are therefore more likely to be punished by the very bond markets that previously favored them. A rise in nominal interest rates can add billions to a government’s debt servicing costs every year, crowding out investment in other parts of the public sector. In extreme cases of market panic, bond vigilantes can deprive governments of loanable funds altogether and expose countries to sudden stops.
Yet the “bond market” is not a single entity and neither governments’ nor investors’ appetites for risk are uniform. Previous studies focusing on governments led by mainstream parties found that government responses to bond market pressures depended heavily on context. For example, Charlotte Rommerskirchen and Alison Johnston and Zsófia Barta found that “market punishment” only caused governments to engage in austerity if they were within the Eurozone, had high levels of public indebtedness, or had large foreign investor bases.
When faced with pushback from investors, populist parties must decide whether to betray their supporters and abandon policies that investors dislike to preserve privileged access to sovereign borrowing or to defy the preferences of investors at the expense of higher borrowing costs. Caving to market pressure, especially if it involves a reversal in policies demanded by their base, should be particularly harmful to far-right populist governments. Not only would it make these “strongmen” appear feeble but they would also appear beholden to the very elites they publicly scorn.
Our paper compares the 2018-2019 M5S/Lega coalition in Italy and Viktor Orbán’s 2018-2022 Fidesz government in Hungary. We find that recalcitrant domestic bondholders were more effective than foreign bondholders in forcing these two far-right governments to pull back on their headline economic policies. Populists in Italy and Hungary were not forced to change course because of the behavior of the outsiders that they disparaged but because of the loss of confidence among the insiders whose interests they championed.
In Italy, the M5S/Lega coalition introduced its “People’s Budget”, which promised to introduce a universal basic income, tax cuts, and reverse prior pension reforms that raised the retirement age. The government defiantly defended its 2018 budget against six months of foreign capital flight, credit rating downgrades, and pressure from the European Union. What finally caused these populists to reverse course—cutting seven billion euros from M5S’s citizen’s income policy and abandoning both parties’ electoral promises to repeal cost-saving pension reforms made by prior governments—was the collapse in demand in Italian bonds from domestic investors in the November 22, 2018 BTP Italia bond auction. Despite its higher coupon rate reflecting elevated political risk, the sale (2.164 billion euros) was only a fourth of the amount that the government anticipated, and domestic purchases were a mere quarter of the average of domestic purchases from the prior eight auctions.
The “People’s Budget” would not be viable unless the coalition government could raise sufficient funds from domestic investors, and the November BTP Italia auction indicated they might not be able to do so. The M5S/Lega coalition could not ignore the implications of being shunned by domestic bond investors, particularly given Italy’s high indebtedness and rising debt servicing costs resulting from the budget stand-off. The day after the auction, the government announced that they saw “room for dialogue” on Italy’s budget plans with the European Commission, and later that year produced a budget that reversed course on their original promises.
In the case of Hungary, Viktor Orbán should have been more insulated from the pressures of bond holders, given a decade of financial subordination that significantly reduced Hungarian debt holdings among foreign investors. But as inflation and government financing needs rose in Hungary between 2021-22, domestic investors facing unpredictable returns lost their appetite for bond holdings in Hungary’s forint currency, even as yields rose significantly. As a result, the Orbán government was forced to pull back on key election spending promises, return to foreign bond markets, offer more attractive inflation-linked forint bonds to lure domestic investors, and attempt to secure endangered EU funds by agreeing to implement rule-of-law reforms and support limited EU financing for Ukraine. Notably, Hungary’s international bond ratings remained investment grade throughout this crisis and foreign investors exhibited relatively strong support for Hungarian forex bonds.
Once inflation began to subside in 2023, the government punished recalcitrant domestic investors through financial repression policies intended to force banks and households to invest in government bonds. But Orbán and his Fidesz party paid a political price for their backtracking. In early July 2022, polls had indicated over 60% support for Fidesz, an even higher percentage than the party had received in the April 2022 elections. But after the government raised taxes and reneged on its populist spending promises later that summer, protestors took to the streets and the party’s poll ratings immediately began a steady slide downward. Amidst economic malaise and corruption scandals, former Fidesz official Péter Magyar led the center-right Tisza (Respect and Freedom) Party to a strong showing in the 2024 European Parliament race and then to a two-thirds majority in the 2026 Hungarian parliamentary elections, ending Fidesz’s longstanding dominance of Hungarian politics.
Bond markets have even managed at times to constrain U.S. President Donald Trump, leader of the country that issues the world’s major reserve currency and bond holders’ safe-haven asset of choice (long-term U.S. Treasury securities). After Trump’s extreme “Liberation Day” tariff schedule unleashed panic in bond markets, Trump reversed course and implemented a pause on most tariffs. But while foreign investors grab the headlines, it is domestic investors, including the Federal Reserve, that hold over two-thirds of U.S. government debt. Since far-right leaders must maintain the trust of financial markets to keep money flowing to their governments, domestic bond holders remain one of the last potentially effective checks on empowered far-right leaders.
Author’s Disclosure: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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