Do populist governments bend their economic policies to the preferences of bondholders? Populist governments should be a “least likely” case for the market discipline hypothesis. Populist parties typically run on platforms that scapegoat wealthy elites as “enemies of the people” and hence should be more resistant to changing policy positions in the face of market pressure, given their reluctance to alienate their base. Employing most-different case studies of the Five Star Movement/Lega coalition in Italy and Viktor Orbán’s government in Hungary, we find that populists do bend to market pressure but that this “disciplining effect” does not stem primarily from foreign investors. Rather, it was the inaction of domestic investors in bond auctions that caused these governments to reverse course on headline economic policies. Because domestic investors served as both governments’ “buyers of last resort,” they needed to maintain their favor amidst foreign capital flight.
