Debt Vulnerability Analysis : A Multi-Angle Approach
Countries with high debt exposure are vulnerable to economic and financial shocks that could lead to sovereign defaults. This paper develops a methodology to identify countries that are at risk of debt default based on four elements of debt vulnera...
| Main Authors: | , , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2022
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/514551644261687296/Debt-Vulnerability-Analysis-A-Multi-Angle http://hdl.handle.net/10986/36970 |
| Summary: | Countries with high debt exposure are
vulnerable to economic and financial shocks that could lead
to sovereign defaults. This paper develops a methodology to
identify countries that are at risk of debt default based on
four elements of debt vulnerability. These elements capture
the different ways in which risks associated with high debt
are assessed, namely: (i) the fundamental, (ii) the
subjective, (iii) the judgmental, and (iv) the theoretical.
The fundamental element considers the liquidity, solvency,
and institutional risk elements of debt vulnerability. The
subjective element captures the investors’ perceptions of
debt default, while the judgmental element is based on the
debt thresholds as defined by Debt Sustainability
Frameworks. Finally, the theoretical element is normative
and captures what ought to be. The methodology constructs an
index for each of these four elements and uses them as
predictors in a model of public debt default. The
methodology flags countries that are at risk of default by
means of machine learning techniques and delivers outputs
that point to underlying causes of vulnerability. The
methodology complements existing monitoring tools for
assessing debt sustainability. |
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