ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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What Does the Empirical Evidence Tell Us?

Determinants of Sovereign Defaults

Developing-country defaults on their external debt repayments are a function of both their 'willingness to pay' as well as their 'ability to pay'. While the ability to repay can be captured by economic factors like the growth rate of the economy and external shocks, willingness to repay is more difficult to measure. In this paper, it is emphasised that political factors are important determinants of the willingness to repay and should be treated as an explanatory variable explicitly. A multivariate probit model is estimated that tests the hypothesis that the probability of default is inversely related to the level of democracy in the debtor country. It is shown that the evidence doesn't support the hypothesis.

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