Estimating the Risk of Third World Debt

In August 1982, Mexico announced that it was unable to meet its debt obligations then falling due. Since this announcement more than 40 countries have been forced to reschedule on debt owed to commercial banks. Commercial banks have been criticized for blindly providing the lesser developed countries (LDCs) more credit and exposing themselves to more and more risk. For example, six months prior to Mexico\u27s announcement that it could not meet its debt obligations, Mexico had been granted 6.4 billion dollars in new loans to make a total of 84 billion dollars in loans that needed to be rescheduled. If commercial banks had had more information on the credit risk of the LDCs, they could have foreseen such an event and taken some precautions, such as curtailing lending, to minimize their losses. Increased information on the riskiness of LDC debt could be extremely useful to commercial banks when making lending decisions or provisions. The purpose of this research is to estimate the risk associated with LDC debt, and to determine the variables which are significant in assessing this risk