The World Bank Economic Review Advance Access originally published online on August 28, 2006
The World Bank Economic Review 2006 20(3):341-365; doi:10.1093/wber/lhl006
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When Is External Debt Sustainable?
Aart Kraay is lead economist in the Development Research Group at the World Bank; his email address is akraay{at}worldbank.org.
Vikram Nehru is director of the Economic Policy and Debt Department at the World Bank; his email address is vnehru{at}worldbank.org.
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.