What's in a default? Lending to LDCs in the face of default risk

Easton, Stephen T.; Rockerbie, Duane W.

doi:10.1016/s0304-3878(98)00116-3

Cited by 22 publications

(18 citation statements)

References 17 publications

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“…Our analysis departs from that of Ozler (1993) and Reinhart et al (2003) Edwards (1986), Ozler (1993), Eichengreen and Mody (1999), Easton and Rockerbie (1999). 4 See for example Eaton (1996) or Obstfeld and Rogoff (1996, p.379) effects.…”

Section: Review Of Empirical Literaturecontrasting

confidence: 79%

Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History

Benczúr

Ilut²

2005

SSRN Journal

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This paper is an empirical investigation into the role of credit history in determining the spread on sovereign bank loans. It employs an error-in-variables approach used in rationalexpectations-macro-econometrics to set up a structural model that links sovereign loan spreads to realized repayment behavior. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems (a "pure reputation" effect) from one that goes through increased default probabilities. Using developing country data from the period 1973-1981 and constructing continuous variables for credit history, we find that past default is a significant determinant of the spread, even after including country fixed effects. Moreover, its reduced-form effect is very similar to its structural form effect, indicating that most of the influence of past repayment problems is through the reputation channel. Overall, reserves to imports, past and predicted future default are substantial determinants of sovereign bank loan spreads. JEL Classification Numbers: F30, F34, G12, G14, G15

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Section: Review Of Empirical Literaturecontrasting

confidence: 79%

Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History

Benczúr

Ilut²

2005

SSRN Journal

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“…However, when the IMF announces that it will lend to countries in arrears-as it did in the case of Mexico in 1989 under the Brady Plan-it speeds resolution of crises and transfers most of the surplus to the debtor. Recent empirical studies support this more positive assessment of the IMF's impact on rescheduling, default and interest rate spreads (Easton andRockerbie 1999, Marchesi 2003).…”

Section: New Directionsmentioning

confidence: 92%

The International Monetary Fund: A review of the recent evidence

2008

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A review of recent quantitative studies on the International Monetary Fund reveals that much of the conventional wisdom is incorrect. Recent studies have demonstrated a new degree of methodological rigor, have drawn more heavily upon insights from political science, and have asked a number of new questions. We review studies of participation in IMF programs, design of IMF conditionality, implementation and enforcement of IMF conditions, conventional program effects and catalytic effects. At every stage, we find substantial evidence of the influence of major IMF shareholders, of the Fund's own organizational imperatives, and of domestic politics within borrowing countries. We conclude that very little is known with certainty about the effects of IMF lending, but that a great deal has been learned about the mechanics of IMF programs that will have to be taken into account in order to obtain unbiased estimates of those effects.

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“…The comparison of the results of these two studies shows that-in spite of a different data analysis approach-the predicted ratings are strongly correlated, at the surprising level of 98%. Brewer and Rivoli (1990), Cook and Hebner (1993), Haque et al (1996Haque et al ( , 1997, Larrain et al (1997), Remolona et al (2008) Debt/exports Aylward and Thorne (1998), Cantor and Packer (1996), Feder and Uy (1985), Hu et al (2002), Larrain et al (1997), , Monfort and Mulder (2000) Debt a /GDP Aylward and Thorne (1998), Brewer and Rivoli (1990), Cook and Hebner (1993), Feder and Uy (1985), Haque et al (1996Haque et al ( , 1997, Hu et al (2002), Debt/reserves Manasse et al (2003), Monfort and Mulder (2000) Dependence on oil exportation Feder and Uy (1985) Domestic investment/GDP Larrain et al (1997), Monfort and Mulder (2000) Exports/GDP Thorne (1998), Bissoondoyal-Bheenick (2005) Exports concentration Feder and Uy (1985) Exports growth rate Feder and Uy (1985), Haque et al (1996Haque et al ( , 1997, Monfort and Mulder (2000), Exports vulnerability to external shocks Feder and Uy (1985) Easton and Rockerbie (1999), Feder and Uy (1985), Haque et al (1996Haque et al ( , 1997, Monfort and Mulder (2000) Trade openness Easton and Rockerbie (1999) Treasury bill rate Haque et al (1998), …”

Section: Discussionmentioning

confidence: 99%

Reverse-engineering country risk ratings: a combinatorial non-recursive model

2009

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The central objective of this paper is to develop a transparent, consistent, selfcontained, and stable country risk rating model, closely approximating the country risk ratings provided by Standard and Poor's (S&P). The model should be non-recursive, i.e., it should not rely on the previous years' S&P ratings. The set of variables selected here includes not only economic-financial but also political variables. We propose a new model based on the novel combinatorial-logical technique of Logical Analysis of Data (which derives a new rating system only from the qualitative information representing pairwise comparisons of country riskiness). We also develop a method allowing to derive a rating system that has any desired level of granularity. The accuracy of the proposed model's predictions, measured by its correlation coefficients with the S&P ratings, and confirmed by kfolding cross-validation, exceeds 95%. The stability of the constructed non-recursive model is shown in three ways: by the correlation of the predictions with those of other agencies (Moody's and The Institutional Investor), by predicting 1999 ratings using the non-recursive model derived from the 1998 dataset applied to the 1999 data, and by successfully predicting the ratings of several previously non-rated countries. This study provides new insights on the importance of variables by supporting the necessity of including in the analysis, in addition to economic variables, also political variables (in particular "political stability"), and Peter L. Hammer tragically died in a car accident on December 27, 2006, after this manuscript was essentially completed. The authors express their appreciation to Dr. Sorin Alexe for his invaluable help in the execution of computational experiments with LAD.

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What's in a default? Lending to LDCs in the face of default risk

Cited by 22 publications

References 17 publications

Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History

Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History

The International Monetary Fund: A review of the recent evidence

Reverse-engineering country risk ratings: a combinatorial non-recursive model

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