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The World Bank Economic Review Advance Access published online on August 28, 2006
The World Bank Economic Review, doi:10.1093/wber/lhl006
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© The Author 2006. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Article

When Is External Debt Sustainable?

Aart Kraay 1 * and Vikram Nehru 2

1 Lead economist in the Development Research Group at the World Bank
2 Director of the Economic Policy and Debt Department at the World Bank

* To whom correspondence should be addressed.
Aart Kraay, E-mail: akraay{at}worldbank.org


  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.


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