LDC Credit-risk Forecasting and Banker Judgement

The international banking system has been a major creditor of less-developed countries (LDCs) since the 1970s. Since the Mexican moratorium of 1982, there have been frequent interruptions to flows of debt-service, along with periodic waves of restructurings and reschedulings. These continued through the 1990s, notably in Latin America and the former Soviet bloc. During 1997±99, there were major financial crises in Asian countries such as Thailand and South Korea that were formerly regarded as extremely sound, while Russia in effect defaulted. Banks are in the business of measuring and managing risk, and the assessment of country credit-risk is a vital activity for banks involved in international lending. Considerable resources are devoted to it, and yet recent events suggest that the results are to a great extent unsatisfactory. Calverley (1990) surveys the methods used, which range from desk research and country visits, through checklist systems, scenario analysis, scoring systems (which generate a numerical rating), and multivariate techniques (essentially logit and discriminant analysis), to formal countryspecific econometric models. The central issue that this paper Journal of Business Finance & Accounting, 28(3) & (4), April/May 2001, 0306-686X