Thus the argument that joining HIPC means the declaration of bankruptcy by the country holds no water. Equally important, assessing the possibility of national bankruptcy is a very subjective matter. In reality, it is hard to forecast future national outputs, and perhaps more importantly, there may be limits to the share of GDP that a country is willing to devote to repaying foreign creditors. For this reason, while policymakers often view persistently large current account deficits as a portent of future borrowing problems, creditors tend to have a differentiated view of each country s situation. In most cases, the key variable is the trade balance.
Trade balance is the net amount of output the economy transfers to foreigners each period.
Between 1950 and 1994, Australia s current account was in deficit in all but four years, while Canada s was in deficit in all but five. On the contrary, they have been able to finance their external borrowing with remarkably little difficulty. The reasons for Australia s continuing creditworthiness were less obvious, because the country has had persistent trade deficits since 1976. History also suggests that lenders face a great deal of uncertainty about borrower characteristics and preferences. For example, radical economic liberalization and macroeconomic stabilization in Argentina, Chile and Mexico returned these countries to world capital markets in the 1990s after their debt crisis of the 1980s.