Brewer and Rivoli (1990) discuss the means by which political risk and instability can affect a country's general creditworthiness. They suggest that unstable regimes divert resources into forms of wealth that are easier to protect than long-term investments, weaken a government's ability to extract the necessary resources from its citizens, and increase investor uncertainty. Furthermore, unstable political conditions can often prevent sound economic management. If the result is that country's with unstable political systems have difficulties attracting external financing, they may be more reliant on the IBRD to obtain funds in the first place. Then if economic conditions force default, if IBRD debt forms a greater share of the portfolio of a more politically unstable country, _ceteris paribus,_ default on IBRD debt is more likely to occur. In this circumstance, default on the IBRD debt is not in itself a political act, merely political conditions result in IBRD debt being one of the few forns of external financing available. We examine this hypothesis by considering the interaction between political conditions and the share of IBRD debt, and multilateral debt in general<sup>3</sup> , in total debt outstanding.

We might expect political factors to have an even stronger impact on a country's decision to default to the IBRD. The IBRD's status as a preferred creditor and its role as a catalyst in attracting financing for countries from other creditors suggest that a country would be likely to emphasize meeting its financial obligations to the IBRD ahead of those to bilateral or commercial creditors. Therefore if default does occur, it may result from a deliberate political act, arising from political tensions between the defaulter nation and the nations with the larger controlling shares in the World Bank. That is nations may be particularly _unwilling_ to repay the IBRD, even if they are able to repay some other creditors.

It is likely that political factors therefore impact on both ability and willingness to repay, and we can try and separate the two effects by considering the interaction between political variables and economic conditions. This enables us to distinguish between the cost-benefit and debt-capacity capacity approaches discussed in the theoretical overview.

In recent years there has been a proliferation of data measuring various aspects of governance.<sup>4</sup> However, the majority of these series are of relatively recent origin, preventing their use in our study. Political Risk Services (PRS) produces the Intemational Country Risk Guide (ICRG), which has compiled monthly data on a variety of political, financial and economic risk factors since 1982.5 In addition to a total political risk score, they also provide scores for 12 components of political risk, which are described in Appendix 1. This detailed breakdown of the political risk index enables us to examine which , if any, of the dimensions of political risk have most impact on sovereign default.

> 3 The argument for considering all multilateral debt is that default to the IBRD may not be considered more detrimental than default to other multilaterals, so that if a country has a high multilateral debt to total debt ratio, it may be more likely to default on a proportion of all multilateral debt, including debt to the IBRD. 4 Kaufmann, Kraay and Zoido-Lobat6n (1999a) describe a new database containing over 300 governance indicators compiled from a variety of sources. In a related paper (1999b) they utilize a variant of an unobserved components model to combine this information into aggregate governance indicators. As these data series get longer, it may be preferable to use their indices in the model.

> 5 We used data from 1984 onwards due to comparability issues with the 1982-83 data.

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