additionally important. We report type I and type II errors for both a 0.05 cutoff, and a 0.10 cutoff, the latter being preferred in this case as it is approximately the sample mean default propensity.

A cursory examination of the IBRD default history shows that countries typically<sup>22</sup> default to other creditors before defaulting to the IBRD; this analysis enables us to understand more clearly why certain countries do not continue into default to the IBRD, whereas others do. Together with the results of the previous section, these results therefore do provide evidence of a graduated hierarchy of default, whereby nations first default to other creditor groups, and then only default to the IBRD under more severe circumstances. A country with a high share of short-term debt and IBRD debt will clearly find it harder to make its IBRD payments, and together with unfavourable political circumstances, such as a heavy military presence and external conflict, this will increase the chances of subsequent default to the IBRD.

# **7. Conclusions**

The small number of cases of IBRD nonaccrual and their seemingly idiosyncratic, political nature have led several observers to conclude that one can simply not model IBRD default. This study provides some ammunition against this viewpoint, and shows that while modeling can be difficult, it is possible to identify key economic, political and external variables which impact on the likelihood that a country will default to the IBRD. The results provide evidence of a graduated hierarchy of defaults, whereby countries in trouble first default to Paris Club and/or Commercial Bank creditors, and only then default to the IBRD if circumstances are particularly unfavourable. Default to the IBRD is thus a distinct, but related, phenomenon to default to other creditor groups.

The relatively larger number of defaults to Paris Club and Commercial Bank creditors enables one to discern the effects of more variables than is possible with IBRD default, and to obtain more accurate within sample fits. For both creditor groups the within sample Type I and Type II error percentages were in the order of 5-6%, which compares favourably with much of the literature in this area. The resulting models of default contain many of the standard ratios considered in country-risk analysis, such as Total Debt/Exports, Reserves/Imports, Private Arrears/Total Debt Stock, Short-term Debt/Total Debt Stock, Exports/GDP and Imports/GDP. In addition, political and external factors, including the investment profile, the extent of military involvement in politics, the real LIBOR rate and the G7 Current Account Deficit/GDP, also impact on the probability of default.

We modeled IBRD default both separately, and through a two-step process whereby we first considered default to other creditors, and examined the factors which result in subsequent default to the IBRD. In both cases we arrive at a parsimonious model of IBRD default in which a country is more likely to default if it has severe problems with other creditors, as measured by high private arrears and a low debt service paid/due ratio,

> **22** The only cases of default to the IBRD without "default" to other creditors are for two countries which did not obtain IMF Programs, and thus could not undertake Paris or London Club reschedulings. Nevertheless these countries stopped paying their other creditors, and a better definition of default would capture this.

28