The object of this research is to determine whether
U.S. commercial banks could have predicted in advance the
debt crises of the developing countries, i.e., whether a
particular LDC would reschedule or default on its loans. A
secondary purpose was to determine whether the debt crisis
was the fault of the banks or the developing countries who
reneged on their loan contracts. What do the banks have to
do to prevent this from happening? What do they have to do
to manage country risk effectively?
The study begins with a historical account of the
United States banking system to the period of debt
rescheduling by the LDCs. It continues by describing the
different types of risks in international banking. Next it
discusses the theoretical issues of LDC debt, including
sustainability of debt policy, optimal level of country
borrowing, optimal bank foreign lending, and credit
rationing by the banks. This is followed by a description
of the regulatory aspects of country risk management.
The important issue of country risk management by U.S.
banks is next, including a discussion of the various
assessment methods used and a review of the major empirical
studies that used econometric methods for predicting the
incidence of external debt defaults.
The empirical research investigates debt rescheduling
by less developed countries. Linear discriminant function
and logistic discrimination approaches were used to
determine the predictive ability of any particular subset
of economic variables. The sample comprises data on 37
countries over a period of 10 years, 1974-1983. This
period was chosen because it was a time of important
economic transition.
The results of the discriminant and logistic analyses
show modest discriminatory power for predicting the
rescheduling of debt of a country with the set of economic
predictors used.