What types of close ties could signal a country's unwillingness to honor its debt obligations? Emerging markets face many potential types of groupings with many different types of countries. Not every country can go along with good company even if it so chooses; one cannot simply proclaim membership in organizations such as the EU and NAFTA. Of the organizations that remain available to emerging markets, some are with less than desirable countries. Practically, then, it is important to examine the many cases where countries sign on to integration arrangements that include members with poor reputations. The task of this chapter is to examine the downside of the company you keep – that is, when joining agreements with countries that have bad reputations tells investors that debt servicing might not be a priority. Following the logic of the theory, when countries form close unions with nations of low political quality, expectations of risk would increase.

Examining the consequences of “bad company” is an important component of the central argument (Hypothesis I). It shows the mirror image of the drop in risk perceptions that occurs when emerging markets gain credibility by signing on to groups with good members. The flip side of this phenomenon should be an increase in risk when countries join arrangements with poor-quality members. For a country about which investors have mixed expectations, the international signal of closer ties with a known quantity of ill repute should in turn make the joining country seem more risky to investors.