Determinants of External-Debt Crises. A Probit Model

Abstract

The issue of EDC became increasingly important in the field of development economics primarily because EDC has been occurring more frequent after the deregulation of global financial flows in the 1970s (Tiruneh 2004, Jones 2015) hitting mostly MICs and LICs. Assessing the probability of an EDC to occur is especially important since recovery from an EDC imposes additional costs on the affected economies in tangible and non tangible terms. The main findings of my research boil up to the following conclusions. First, an increase in the level of inflation, share of short term debt in ED, net barter TOT, total debt service to GNI ratio, and share of income held by the richest 10% and share of agriculture in GDP leads to an increase in the probability of an EDC to occur. Second, an increase of are total reserves to ED ratio and the total debt service to GNI ratio leads to a decrease of the probability of an EDC to occur. Therefore, holding FX reserves is a strong protective measure from an EDC. Third, the share of income held by the richest 10% of the population is an especially strong determinant of EDC for the LMICs; while in the LICs the effect of this factor is opposite, meaning that LICs with low level of income inequality have higher risk of a debt distress. The probit model helps to predict the probability of the EDC to occur in any given country using the values of the determinants. (The abbreviations are clarified in the text.)