Allow me to share this podcast from the Federal Reserve Bank of Richmond where Marina Azzimonti discusses the mechanisms that could lead to an institutional risk premium.
The podcast is available here, and the paper is available here.
International organization loans to emerging markets can create incentives for corruption, leading to irresponsible public spending increasing the probability of a future sovereign default. In turn, this produces a premium on sovereign debt. This institutional risk premium can be limited with a stronger institutional background and sounds check and balances that reduce these incentive for over-borrowing and overspending, especially when an emerging country receives a loan from an international organization.
References
Azzimonti, Marina and Mitra, Nirvana, The Politics of Debt in the Era of Rising Rates (October 25, 2024). Available at SSRN: 5002410.