On the determinants of a borrowing country's creditworthiness in a debt rescheduling context
To evaluate the creditworthiness of borrowing countries in a debt rescheduling environment, this study explores the spread determination models, in which the variation in spread among various borrowers is explained primarily as a function of their perceived riskiness. Along the line of the Feder & Just model and the Edwards model, a reformulation is made to extend these two models into a multiperiod profit-maximizing spread determination model. This study classifies the debt rescheduling risk determinant into three major components: the rescheduling cost attributes, the country characteristics and the loan parameter vector. The data for rescheduling loans from commercial banks in this study will cover an 11 year period (1980-90) including 256 debt rescheduling observations in 42 rescheduling countries. While the empirical estimates satisfy the theoretical framework, Chow tests have shown that the structural stability needs to be implemented by a fixed-effect specification which allows for constant term and slopes varying across countries and time. A 2SLS specification has been conducted to investigate the assumed simultaneity between loan maturity and loan spread, and between management fees and loan spread. Finally, this study creates a modified spread determination model by factoring management fees into loan spread and shows it to be more accurate on risk projection. The major conclusions from this study are: (i) Short-run (liquidity) variables have more explanatory power than long-run (solvency) variables in evaluating debt rescheduling risk. (ii) Specific country risk is less important than time related market conditions. (iii) Current aggregate investment by a country does not necessarily reduce its rescheduling risk. (iv) Loan parameters make a significant contribution to rescheduling explanation and prediction. (v) Historical rescheduling behavior provides little negative impact on borrowers' creditworthiness. (vi) Management fees need to be included as part of the spread and cannot be ignored.
Wang, Wei, "On the determinants of a borrowing country's creditworthiness in a debt rescheduling context" (1992). ETD Collection for Fordham University. AAI9223828.