Comments on ‘Country Risk: A Model for Predicting Debt Servicing Problems in Developing Countries

Abstract

The chapter by Abassi and Taffler reports heroic acts of econometrics performed on a heroic scale. To the best of my knowledge this study represents, both in terms of methodology and in terms of the range of countries and indicators covered, the state of the art in applying the techniques of corporate bankruptcy and analysis popularised by Altman (1968, 1983) to the analysis and forecasting of sovereign debt rescheduling. Since I am very much in sympathy with the authors observations concerning the need to supplement the (generally biased and over-optimistic) subjective judgements of risk made by individuals, with some more objectively determined measures, it should be taken as read that none of the comments I am about to make in any way absolve practising international bankers from their duty to take seriously the lessons of this chapter. My comments are, in fact, directed specifically at answering questions which a practitioner might have, concerning the analysis presented in the chapter. First, how robust and reliable are the statistical techniques used by the authors? Second, to what extent is the information provided by this type of analysis useful in taking decisions concerning the pricing and distribution of lending?