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LDC's Foreign Borrowing and Default Risk: An Empirical Investigation

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  • Sebastian Edwards

Abstract

This paper investigates to what extent the international financial community has taken into account the risk characteristics of borrowing less developed countries when granting loans. Specifically, this study analyzes the determinants of the spread between the interest rate charged to a particular country and the London Interbank Borrowing Rate (LIBOR). The empirical analysis uses data on 727 public and publicly guarantied Eurodollar loans granted to 19 LDC's between 1976 and 1980. The results obtained show that lenders in Eurocredit markets have tended to take into account (some of) the risk characteristics of borrowers. In particular it was found that the level of the spread will be positively related to the debt/GNP ratio and the debt service ratio. On the other hand, the spread will benegatively related to the international reserves to GNP ratio and the propensity to invest. The results obtained also show that an increase in the foreign debt coupled with an equivalent increase in international reserves will tend to leave the perceived probability of default unaffected. The empirical analysis presented in this paper also indicates that as late as 1980 the international financial community had not perceived any significant increase in the probabilities of defaulting in the countries that eventually run into serious debt problems (i.e., Argentina, Brazil, Mexico).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1172.

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Date of creation: Oct 1984
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Handle: RePEc:nbr:nberwo:1172

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  1. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February.
  2. Willem H. Buiter, 1980. "Implications for the Adjustment Process of International Asset Risks: Exchange Controls, Intervention and Policy Risk, and Sovereign Risk," NBER Working Papers 0516, National Bureau of Economic Research, Inc.
  3. Frank, Charles Jr. & Cline, William R., 1971. "Measurement of debt servicing capacity: An application of discriminant analysis," Journal of International Economics, Elsevier, vol. 1(3), pages 327-344, August.
  4. Hanson, James A, 1974. "Optimal International Borrowing and Lending," American Economic Review, American Economic Association, vol. 64(4), pages 616-30, September.
  5. Marc Nerlove, 1968. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross-Sections," Cowles Foundation Discussion Papers 257, Cowles Foundation for Research in Economics, Yale University.
  6. McCabe, James L & Sibley, David S, 1976. "Optimal Foreign Debt Accumulation with Export Revenue Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(3), pages 675-86, October.
  7. Feder, Gershon & Ross, Knud Z, 1982. " Risk Assessments and Risk Premiums in the Eurodollar Market," Journal of Finance, American Finance Association, vol. 37(3), pages 679-91, June.
  8. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
  9. Fuller, Wayne A. & Battese, George E., 1974. "Estimation of linear models with crossed-error structure," Journal of Econometrics, Elsevier, vol. 2(1), pages 67-78, May.
  10. Nicholas Sargen, 1977. "Economic indicators and country risk appraisal," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 19-35.
  11. Brunner, Karl & Meltzer, Allan H., 1982. "Economic policy in a world of change," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 1-6, January.
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