Unsurprisingly a country is more likely to default involving a coup d'6tat.'<sup>7</sup> The final factor to have an effect is the G7 Current Account Balance/GDP ratio, reflecting the importance of the global environment on sovereign default. Theoretically this ratio represents both the demand by G7 countries for other nations' exports and also the supply of funds available from G7 countries. We find a greater G7 current account surplus relative to GDP to reduce the probability of default. This indicates that the liquidity effect, whereby more global funds are available for borrowing, dominates any effect from a reduction in exports on the propensity to default. In the data we see this through a close association between the real LIBOR rate and the G7 Current Account/GDP ratio<sup>1</sup> 8 - omitting the G7 CA/GDP ratio results in a significant positive coefficient on the real LIBOR rate. The small trade effect also reflects the fact that the majority of G7 imports originate from developed countries, so that the effect of changes in the Current Account surplus on developing country exports may be of second order.

In the final column of Table 5 we report standardized coefficients from the pooled logit submodel. In a logit model, the effect of a unit change in one of the regressors depends on the levels of all the regressors, so we standardize the coefficients by evaluating the partial derivative at the mean probability level in the sample. That is the standardized coefficients are = p(1 -p),8. The mean probability level in our sample is 0.0607, **_&xk_** which is very close to our cutoff threshold of 0.05. Thus the standardized coefficients reflect the effect of a change in the regressor for a country which is a border-line default case on the estimated default probability. Thus, for example, an increase in the budget deficit by an extra 1% of GDP increases the probability of default by 0.0046 at the mean. The range of the various regressors varies, but for each variable a change in one standard deviation of the variable has an impact on the default probability of approximately 0.05 in magnitude.

We report the within sample fit for a range of cutoff probabilities, and see that in accordance with the findings of Cline(1984), a low threshold probability is to be preferred in order to balance Type I and Type II errors. Over a range of models, a threshold of 0.05 seemed reasonably robust, and we suggest this be used, with countries with probabilities in the 0.03-0.05 range examined on a case-by-case basis. We see that with a 0.05 threshold, the Type I error is 4.88% and the Type II error is 8.68%, which indicates a good within sample fit. We then reestimated the model using only defaults which occurred prior to 1994, using this model to examine the out-of-sample fit over the period 1994-98. 9 The results are reported at the bottom of Table 5 and indicate the model performs well over this period.

> 17 Stronger overall politics, as measured by the total political index, lessens the likelihood of default, but once the military variable was included the overall effect was insignificant.

> **18** The correlation between the G7 current account balance/GDP and the real LIBOR rate was -0.551.

> 19 Of course this is not a true test of out-of-sample fit as we have already used the data from 1994-98 in our model selection process. However the scarcity of defaults precludes withholding these observations from all stages of the estimation process, and the analysis carried out here at least indicates that the model is stable over this period.

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