Unpleasant Surprises: Sovereign Default Determinants and Prospects

19 Pages Posted: 20 Apr 2016

See all articles by Luca Bandiera

Luca Bandiera

World Bank

Jesús Crespo Cuaresma

Vienna University of Economics and Business

Gallina Andronova Vincelette

The World Bank

Date Written: August 1, 2010

Abstract

This paper uses model averaging techniques to identify robust predictors of sovereign default episodes on a pooled database for 46 emerging economies over the period 1980-2004. Sovereign default episodes are defined according to Standard&Poor?s or by non-concessional International Monetary Fund loans in excess of 100 percent of the country?s quota. The authors find that, in addition to the level of indebtedness, the quality of policies and institutions is the best predictor of default episodes in emerging market countries with relatively low levels of external debt. For emerging market countries with a higher level of debt, macroeconomic stability plays a robust role in explaining differences in default probabilities. The paper provides evidence that model averaging can improve out-of-sample prediction of sovereign defaults, and draws policy conclusions for the current crisis based on the results.

Keywords: Debt Markets, External Debt, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research, Currencies and Exchange Rates

Suggested Citation

Bandiera, Luca and Cuaresma, Jesus Crespo and Vincelette, Gallina Andronova, Unpleasant Surprises: Sovereign Default Determinants and Prospects (August 1, 2010). World Bank Policy Research Working Paper No. 5401, Available at SSRN: https://ssrn.com/abstract=1660302

Luca Bandiera (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Jesus Crespo Cuaresma

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Gallina Andronova Vincelette

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
+1.202.473.0288 (Phone)

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