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Trade financing restrictions and politics: Implications for country risk
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Dissertation
Trade financing restrictions and politics: Implications for country risk
1993
Overview
International credit markets are characterized by potential debt repudiation without formal contract-enforcement mechanisms. In such an environment, creditor penalties and domestic politics are thought to be significant influences on the debt service decision. This study assumes heterogeneous agents make fully-informed, forward-looking expectations of future government policies which result from a Nash-type competition between political parties with different objectives. In an environment in which costs--both from trade financing restrictions incurred for partial repudiation and from \"taxes\" imposed to service debt--are distributed non-uniformly across agents, the model is solved for equilibria levels of external debt service. Analytical results imply: (i) the use of bank-supplied trade financing is positively related to expected levels of debt repayment and (ii) the political influence of users of trade financing is positively related to expected levels of debt repayment. Empirical investigation, using panel data covering a total of seventeen countries whose debt is currently traded on secondary markets, finds statistical evidence to support the propositions mentioned.
