International lending and income redistribution : An alternative view of country risk

The international debt crisis, where many large LDC borrowers were found lacking the ability to service their debt, redirects attention to the process by which those loans were granted. This renewed attention also brought forward the subject of country risk. This paper begins by demonstrating that the traditional measures of borrower credit worthiness had no impact on the credit granting decisions by international banks. The only variable which has some degree of explanatory power is the debt service as proportion of GNP. In other words, LDCs have borrowed money to service existing debts. Against the failure of the traditional model an alternative view is presented. This model is based on elements of political economy and taxation. The big borrowers of the LDC's are viewed as having the power to tax the developed countries and thus to affect a transfer of real income. This view is presented and analysed by means of a game-theoretic model as well as in a development economic framework. The implications of this view are extended to country risk analysis.