Abstract
This study examines the trends in external debt in developing countries across different regions. The variables considered were gross external debt, public and public guaranteed external debt, short-term external debt, and variable rate external debt. The data were collected from the joint BIS-IMF-OECD-World Bank statistics on external debt, pertaining to the period 1995-2014. The results of the study highlight significant regional imbalances in external debt, which may contribute to the risk of sovereign-debt default. East Asia & Pacific region had high level of gross external debt and high percentage of short-term external debt. Europe & Central Asia region had high level of gross external debt, high gross external debt growth rate, high percentage of variable rate external debt, high ratio of short-term external debt relative to GDP, and high ratio of variable rate external debt relative to GDP; perhaps reflecting the ongoing European Sovereign Debt Crisis. Latin America & Caribbean region had high level of gross external debt and high percentage of variable rate external debt. Middle East & North Africa region had high percentage of public and public guaranteed external debt. South Asia had high gross external debt growth rate, high public and public guaranteed external debt growth rate, high short-term external debt growth rate, and high variable rate external debt growth rate in the post-crisis period. Sub-Saharan Africa region had high percentage of public and public guaranteed external debt and high variable rate external debt growth rate in the post-crisis period. Thus, each of the regions had specific types of risk. The individual developing economies in the regions need to be examined carefully to isolate their contribution to regional sovereign-debt default risk
Highlights
IntroductionIn the 1970s, when the oil prices rose steeply and inflation was in double-digits, the Lesser Developed Countries (LDCs) experienced difficulties in fulfilling their external debt obligations
The risk of sovereign default is not a new phenomenon
The percentage of variable rate external debt represents the exposure of the economy to interest rate risk
Summary
In the 1970s, when the oil prices rose steeply and inflation was in double-digits, the Lesser Developed Countries (LDCs) experienced difficulties in fulfilling their external debt obligations This led to the Debt Trap of the Latin American economies in the late 1970s, Argentina and Brazil, which, in turn, led to a chain of defaults. In 1982, the Mexican government declared a freeze on its interest payments and the multinational banks (both US and European) were left with a large number of non-performing assets This crisis led to a new opportunity, the US and European banks started swapping their nonperforming loans which got established as a systematic market. By the spring of 2010, it was veering toward bankruptcy, and had set off a new financial crisis
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