service paid to debt service due for the non-defaulting countries in our sample. Some countries prepay their debt, hence even in the absence of errors and interest changes we would not expect debt paid and debt due to be the same for all non-default countries. We compared the projections from the World Bank with those of the OECD, and found the latter to not be nearly as accurate. Furthermore, using these projections is, in our view, superior to the approach used by Aylward and Thorne (1998) who add arrears to total debt service paid, which does not allow for debt reschedulings, and adds a stock variable to a flow variable. The result is that their measure vastly inflates the amount of debt service due for countries with large arrears going back in time. It is not surprising, thus, that their measure of debt service due is highly correlated with arrears, and thus "default" which they define in terms of arrears.

In addition to the standard debt service to exports ratios, we consider the ratio of debt service paid to debt service due for total, official and private debt, as explanatory variables. The motivation for considering these ratios is that a variety of factors may make a given debt to exports ratio sustainable in one country, but not in another. Examples include differences in tariff rates, foreign investment and international grants. The debt paid/due ratios enable us to look directly at the ability of a country to service all its liabilities, with a country that is not paying all the amount due to other creditors perhaps more likely to default to the IBRD. We capped the ratio at 100%, as data inaccuracies are responsible for most of the over 100% ratios, and the key information is whether a country is meeting its payments or not, not whether it is prepaying.2

# 3.2. **Political Risk**

The creditworthiness of a sovereign nation depends on both the government's ability and its _willingness_ to repay its debt commitments. The economic factors considered above address the ability of a country to repay; political risk addresses the willingness. As Reuss(1996) notes, willingness is a key factor that distinguishes sovereign credits from other types of credits, as creditors have only limited legal redress when, for political reasons, a sovereign government chooses not to repay its debt in time even though it possesses the means. In a cross-sectional study Brewer and Rivoli (1990) examine the effects of politics on perceived country creditworthiness, as measured by country risk ratings, secondary market debt prices and risk premiums charged on sovereign loans. Their results suggest that political variables are at least as important as economic variables in explaining perceived creditworthiness, with regime instability having a stronger impact than either the extent of democracy or the presence of armed conflict, and recent political conditions being more significant than a longer-term political history. In contrast, Lee (1993) uses the same political variables and a different subset of economic variables, and finds that banker's credit ratings appear to assign larger weight to economic variables than to political instability variables. Nonetheless, they still find the frequency of changes in the regime and armed conflict to have an impact on credit ratings. Both these studies offer only cross-sectional comparisons across countries, and do not investigate the effect of political variables in a panel framework.

> **2** In addition we also tried dividing the data into 0-20%, 20-40%, 40-60%, 60-80%, 80-100% divisions, and using a variable coded I through 5 for these divisions, as a further check of accuracy. The results proved robust under this altemative measure.

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