This paper investigates how the level of government effectiveness in a country affects its creditworthiness. We develop a structural model for sovereign credit risk in which the government adjusts its default policy to the ability to collect and use fiscal revenues efficiently. We predict that better-governed countries exhibit lower incentives to default and thus benefit from a narrower sovereign credit spread. Moreover, the impact of government effectiveness on sovereign credit risk is highly non-linear. Specifically, the effect strengthens with the level of default risk, indebtedness, and a deterioration in economic conditions. Using a sample of 62 developed and emerging countries over the period 1996-2010, we provide strong empirical support for the model's predictions.