When Is External Debt Sustainable?
Open Access
- 1 January 2006
- journal article
- research article
- Published by Oxford University Press (OUP) in The World Bank Economic Review
- Vol. 20 (3), 341-365
- https://doi.org/10.1093/wber/lhl006
Abstract
The article empirically examines the determinants of debt distress, defined as periods in which countries resort to any of three forms of exceptional finance: significant arrears on external debt, Paris Club rescheduling, and nonconcessional International Monetary Fund lending. Probit regressions show that three factors explain a substantial fraction of the cross-country and time-series variation in the incidence of debt distress: the debt burden, the quality of policies and institutions, and shocks. The relative importance of these factors varies with the level of development. These results are robust to a variety of alternative specifications, and the core specifications have substantial out-of-sample predictive power. The quantitative implications of these results are examined for the lending strategies of official creditors.Keywords
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