Why do we observe welfare state retrenchment? While a massive literature has been developed on the subject, there is little agreement as to the primary drivers of retrenchment across cases. This paper seeks to refine the literature on welfare state retrenchment by emphasizing the role of costly and volatile sovereign finance. It is argued here that retrenchment occurs primarily when states encounter constraints on new borrowing and are unable to raise sufficient revenues to lower market yields. In responding to a financing crisis, policymakers will respond firstly by raising revenues, as they can be constructed to have diffuse costs and benefits, and will only undertake retrenchment once all revenue raising options have been exhausted. Analysis of a large panel data set of unemployment insurance replacement rates for 21 advanced industrial democracies between 1980 and 2009, as well as a process tracing analysis of the fiscal crises experienced in Argentina and Brazil between 1997 and 2001, lend strong support to this argument.