Sovereign Debt Defaults and Financing Needs

We construct a financial vulnerability indicator that is consistent with the theoretical literature on determinants of defaults. It is based on the amount of new foreign financing that is needed to avoid a default or an import adjustment, expressed as a proportion of the country's sources of foreign currency. As the need for new foreign financing increases, so does a country's financial vulnerability. The indicator has a higher correlation with default episodes than other indicators used in previous studies. In addition, the level at which it leads to a high probability of default is comparable across countries.
Publication date: March 2004
ISBN: 9781451847413
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International - Economics , International - Economics , early warning indicators , probability , debt service , current account , correlation , probabilities , Macroeconomic Aspects of International Trade and Finance , Financial Institutions and Services

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