Rose and Spiegel

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A Gravity Model of Sovereign Lending: Trade, Default, and Credit

Author(s): Andrew K. Rose and Mark M. SpiegelSource: IMF Staff Papers, Vol. 51, IMF Fourth Annual Research Conference (2004), pp. 50-63Published by: Palgrave Macmillan Journals on behalf of the International Monetary FundStable URL: http://www.jstor.org/stable/30035885

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IMF taffPapersVol.51, SpecialIssuea 2004 InternationalMonetary und

AGravityModel of Sovereign Lending:Trade,Default,and CreditANDREWK.ROSEand MARKM. SPIEGEL*

One reasonwhycountriesservice their externaldebts is the ear thatdefaultmightlead to shrinkageof international rade.If so, then creditorsshouldsystematicallylend more to countries with whichtheyshare closer trade links. Wedevelopa sim-ple theoreticalmodel to capturethis intuition,then test and corroborate his idea.[JEL 15,F33]

W Whilehe age of gunboat iplomacy s a mechanism f credit nforcementhas long passed, sovereigndefault is still an exceptionalevent. This styl-ized fact indicates thatwhile the source of a sovereigndefaultpenaltyis still con-troversial,sovereigns behave as if they consider defaultcostly. Many models ofsovereigndebtin the literature e.g., Bulow andRogoff, 1989a, 1989b) introduceexplicit defaultpenaltiesto rationalize his fact.These sanctionsareprimarilycon-sidered to be methods of inhibitingtrade. Bulow andRogoff (1989a) discuss thedifficulties countrieswouldexperience n their tradesubsequent o default,includ-ing complicationsassociated with avoiding seizure and the interruption f short-term trade credit.

*Rose s B.T.RoccaJr.Professor f International rade ndEconomicAnalysisandPolicy n theHaasSchoolof Businessat theUniversity f California, erkeley,NBERresearch ssociate, ndCEPRResearchFellow.Spiegel is SeniorResearchAdvisor,EconomicResearchDepartment, ederalReserveBankofSanFrancisco.WethankRobFeenstra or a comment hathelped nspire hispaper;Rosethanks NSEADfor hospitalitywhile partof thispaperwas written.We also thankGerdHaeusler,PhillipLane,NancyMarion,PauloMauro,MichaelMussa,andparticipantst the IMF'sFourthAnnualResearchConference,andespeciallyMarkWright,orcomments.A currentPDF)versionof thispaperand he STATA atasetused in thepaperare availablevia the Internet t:http://faculty.haas.berkeley.edu/arose.

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A GRAVITY ODEL F SOVEREIGNENDING

Nevertheless, there are a number of reasonswhy one might doubt the exis-tence of defaultpenalties.Bulow andRogoff (1989b) themselves admit that it isunclear whetherprivatecreditorsenjoy the abilityto induce theirgovernments oenforce claims on sovereignborrowers.KletzerandWright 2000) arguethatmostpenalties in models of sovereign lending are not "renegotiation-proof." hat is,Kletzer andWrightarguethat bothpartiescould do bettersubsequent o a full orpartialsovereigndefault,if the creditorresists levying a destructivepenaltyfromwhich (s)he would receive no immediatebenefit. In brief, there is considerableuncertainty concerning the viability of penalties for sovereign default. Thus,empiricalevidence regardingsuchpenaltieswarrantsattention.Unfortunately,hereare only a limited numberof empiricalstudiesconcern-ing such penalties.Ozler (1993) providesevidence of positive, albeit small, pre-miacharged o countrieswith defaulthistories.Cline (1987) notes thatBolivia andPeru experienced interruptions n their flows of short-term rade credits subse-quentto debtrenegotiation. n a recentpaper,Rose (2002) providesempiricalsup-portfor the role of tradeas a sovereignenforcementmechanism.His papershowsthat sovereignParisClubreschedulingsarefollowed by economicallyand statis-tically significantreductions n internationalrade.The evidence of Cline and Rose centerson the interruption f internationaltrade as a mechanism for sovereign debt repayment.If one believes that thepri-mary penalties for enforcing sovereign debt obligations are trade related, thencreditorsoriginatingfrom nations with strong bilateral trade ties with a debtornation should have a comparativeadvantage n lendingto that nation.In this shortpaper,we explore this idea. We first presenta theoretical modelof international ending where a debtor optimally chooses its borrowingfromdifferentcreditors. These creditors are identical except that they are located incountries that differ by the strengthof their bilateral trade ties with the debtor.We show that in equilibrium,the patternof borrowingfavors the creditor withhigherbilateral tradevolume with the debtor. We then test and corroborate hisidea using an annual panel data set including bilateral trade and internationalbanking claims from 20 creditor and 149 debtor countries from 1986 through1999. Using instrumentalvariable(and other)techniques,we find a significantlypositive effect of bilateral trade on bilateral lending patterns.That is, debtorstend to borrow more from creditors with whom they share more internationaltrade ties.While our empiricalresults support he trade sanction sovereign debt modelderived in the paper,the evidence does not necessarily refute pure "reputation-based"modelsof sovereigndebt in which thepenaltyfordefault s exclusionfromaccess to futureborrowing (e.g., EatonandGersovitz, 1981; Kletzer andWright,2000; or Wright,2002), or with mixed models where some combinationof directsanctionsandreputational enaltiesareapplied,such as Kehoe and Levine(1993).1However, it appears hatreconciling reputation-basedmodels with the data with-out introducingnew inconsistencies requiresthe introductionof some friction,

'While he KehoeandLevinemodelallows or assetseizure, t does not considernterruptionsf tradein spotmarkets,whichmightbe considered nalogouso the direct rade anctionsn ourmodel below.

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Andrew K.Rose and MarkM.Spiegelsuch as superiorinformationsets to creditorsfrom those countries engaged ingreaterbilateral rade.2Ourtheoreticalmodel is presented n the next section. We thenpresent he dataset andmethodologyand test the model. Thepaperends with a brief summary.

I. AModel of Sovereign BorrowingwithTrade-RelatedDefault PenaltiesIn this section we develop a simple borrowingmodel in which a sovereigndebtorallocates its borrowingacross differentcreditornations,when defaultpenaltiesarebased on proportionalosses in bilateralgains from trade.We assume that there are three countries:one borrowercountry,i, and twocreditorcountries,a and b. Let r representone plus the world risk-free interestrate.All countriesareassumedto be small and therefore aker as given. Lendingbanks in the creditor countries are risk-neutraland thereforewilling to extendunlimited funds at levels consistentwith an expected returnequalto r.The model has two periods. In the first period, the representativeagent inlendercountry] (j= a, b) extends a loan of magnitudeLij n return or thepromiseof a fixed paymentD1j n the second period. In the second period, the agent indebtorcountryi makes its default decisions. If the debtor chooses to service itscountry debtit paysDij.If the debtordefaults,it suffersa penaltyequalto a frac-tion 0 of its gains frombilateral rade with country , where 0 < 0 < 1.Bilateralgains from trade are exogenous andequal to yTij,wherey is a posi-tive constant and Tij s a randomvariablereflectingtotal tradebetween countryiandcountry in the secondperiod. Expectationsof Tijare unbiased and satisfy

= EI(Tij)+ , (1)whereEI(T1j)epresents he periodone expectedvalue of T1j ndEi s an i.i.d. dis-turbanceermwithexpectedvalue 0 and a symmetricandsingle-peakeddistributionon the interval EiE [E,]. Let F(s) representthe distribution of s, that is, theprobability that Ei< ,, andf(s) represent its density. The creditor nations areassumed to only differ in their expected trade volume with the debtorcountry,with Ei(Tia)> El (Tib).The expected utility function of the representativeagentin country satisfies

EI(Ui)= U(Cl) + PEI(Ci2), (2)where U' > 0, U" < 0, Citrepresentsconsumption n country in periodt (t = 1,2),andprepresents he debtor'sdiscount rate. The specificationthat debtorutility islinearin expected second-periodconsumption s madefor analytic simplicity,butdrives none of our results.

2SeeWright's 2003) commentson ourpaperbelow.Wrightargues hat theassumption f superiorinformationets heldbyprimaryrading artnersmay givethosepartners omparative dvantagesnlend-ing in purereputationmodels withthe additional ssumption f continuous rade n goods to avoid the"excessivegrossflows"problem.

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Andrew K,Rose and MarkM.Spiegel

Equation (8) demonstrates that the debtor skews its borrowing allocationtoward the nationfrom which the impactof a marginal ncrease in borrowingonits probabilityof default s smaller.Since the creditors'riskpremiaaresymmetricfunctions of defaultrisk, equalizingthe marginalcost of the last dollarborrowedin each country mpliesborrowingmore from thecountry hatwould have a lowerprobabilityof defaultif borrowing evels were equal.Of course,doing so pushesup the probabilityof default in this countryrelativeto the other,and narrowsthedifferencebetween these probabilities.This result implies that the optimal allocationof borrowingacross countriesmitigatesthe disparities n defaultrisk across countries.This result fits well withhistoricalexperience,as countriestypicallydefaulton all of their creditorssimul-taneously,or not at all. It should be stressed, however, that the result is an equi-librium outcome of the model, rather hansimply assumed.3Totally differentiating 8) with respectto Lia andE(Tia)yields

Lia r[E(Ti) + 8E]{[1- )]faE:a)+) -) a> 0,aE(Tia a i - F(Ea)]- f(e*)[E(Tia)+ ia2 (9)where the denominatorcan be signed as negative by the debtor's second-ordercondition.

Equation(9) yields our first result. Holding total lending constant,the shareof lending originating n countrya is increasingin the expected volume of tradewith countrya.We can now confront the debtor's overall borrowingdecision. Maximizingexpected utilityin equation(2) over the choice of Lisubjectto the creditors'zero-profitconditions and thedebtor'soptimaldebt allocationruleyields the first-ordercondition

U' - r + Oy{[E(Ti)+ E ) =f, (10)whereby (6) and (7), the partial erm satisfies

de *i rS= > 0. (11)dLia 0y[l - F(EFi)] - f(EiaE(Tia)+ Eia]ITotallydifferentiatingwith respectto LiandEi(Tia)yields

aE Pr[E(Tia)+ e [f'(,I - F(E)] + f(Ea)2] ( 1 2 )gE(Ta) U" + ) - F()] - f(i)[E(ia) E2

3Inthe limitingcase wherethecij'saredistributed niformly,he equilibrium orrowing llocationresults n the debtordefaulting n bothcreditors rnone.

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where the denominatorcan be signed as negative by the debtor's second-ordercondition.Our results demonstrate hat an increasein the expected volume of bilateraltradewith an individualcountry s associatedwith both an increase n overall bor-rowingandanincrease n the shareof overallborrowingoriginatingn thatcountry.Consequently,he model predictsa positive correlationbetweenexpectedbilateraltradevolumesand bilateral ending.In the next section,we test thisprediction.

II. EmpiricsGravityMethodologyWe are interested n estimatingthe effect of international radeon internationaldebt.However,internationalborrowingmay itself encouragetrade;alternatively,bothborrowingand trademay be jointly drivenby common factors. Thatis, it isimportant or us to consider the possibility thatinternationalborrowingandtradeare simultaneouslydetermined.We solve this problem using instrumentalvariables.The popular "gravity"model of bilateral nternational radeprovidesa wealth of potentialinstrumentalvariables.Manyvariablesthatare known to be importantdeterminants f interna-tional tradeareunlikelyto be importantdeterminants f internationalending pat-terns. For instance, a pair of landlocked countriesengages in less internationaltrade,while a pairof physically largecountriesor those that sharea common landborder rademore. But internationalending patternsareunlikelyto be affectedbysuch features.4Weuse suchvariablesas instrumental ariables or trade n a modelof bilateral ending.Since conditions that lead two countries to be more integratedare likely tolead to more financialactivitybetween them,our specificationfor bilateral nter-nationalborrowing evels follows the gravitymodel of internationalradeclosely:

ln(Ci,,) = [ ln(YiY) +a21ln(YYj/PopPop)oj +"31n Dij + f4Langij+ PsContij+ 6FTAij, 37Landlij 38Islandij+ 91ln(AreaiAreaj) P,1oComColij f1iCurColijt (13)+ 12Colonyij 13ComNati P14CUijt+ Yr . Tt,+ (pln(Xij)+ Eijt

where i andj denotescountries,t denotestime, and the variablesaredefinedas:* Cijtdenotesthe valueof reallendingfrom i toj at timet,* Xijtdenotestheaveragevalueof real bilateral radebetweeni andj at timet,* Y s realGDP,* Pop is population,* D is the distancebetween i and ,4Ifbank endingreflects tradecredits,coefficientestimates romourIV estimationmaybe biasedupwards.As our estimated ffect is large,however, t is unlikely hatcorrection or this bias wouldelim-inateour results.

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Andrew K.Rose and MarkM.Spiegel* Langis a binaryvariable hat s unityif i and have a common anguage,* Cont s a binaryvariable hat s unityif i andj sharea landborder,* FTA s a binaryvariable hat s unityif i andj belongto the sameregionaltradeagreement,* Landl s thenumberof landlocked ountriesn thecountrypair(0, 1, or2).* Islandis thenumberof islandnations n thepair(0, 1, or 2),* Areais the land massof thecountry,* ComCol s a binaryvariable hat s unityif i and were ever colonies after1945with the samecolonizer,* CurCol s a binaryvariable hat s unityif i and are colonies at timet,* Colony s a binaryvariable hat s unityif i evercolonized or vice versa,* ComNat s a binaryvariable hat is unity if i and remainedpartof the samenationduring he sample(e.g., theUnitedKingdomandBermuda),* CU is a binaryvariable hat s unityif i andj use the samecurrency t timet,* T,, is a comprehensive et of year-specificntercepts,* pandy are vectorsof nuisancecoefficients,andSEijrepresentshemyriadother nfluenceson bilateral redit,assumed o be wellbehaved.The coefficientof interest o us is (p,the effect of bilateral radebetween coun-tries i and on commercialbank claims by creditorcountry on debtornationi.Weestimate the model with a numberof techniquesbelow.Webegin by usingordinaryleast squares (OLS) with standarderrors that are robust to clustering(since pairsof countries are likely to be highly dependentacrossyears).We thenuse instrumentalvariables,droppingsome of the regressorsfrom the right-hand

side of the equationandusing them as instrumental ariables.Finally,we employfixed- and random-effectspanel data estimators,with and without instrumentalvariables.We use both fixed- and random-effectsestimatorsextensively below.The Data SetWe use a subset of the panel data set of Glick and Rose (2002); the interestedreader s referred o Glick andRose for more details.For the regressandwe use consolidatedforeign claims of reportingbanksonindividualcountries.5Thesebankloans areprovidedby the Bank for InternationalSettlements(BIS) in millions of U.S. dollars for 20 creditorcountriesand almost150 borrowingcountries.6Not all of the areas covered are countriesin the con-ventional sense of the word;we use the term"country" imply for convenience.

5Ourmeasurementf cross-borderbligationsmaycontain rrorsroma number f sources.First, heuse of consolidateddatamaynotcorrectlyassignthe riskof banks' oreignbranches.Second,"outwardrisk transfers" re sometimesused to transfer isksto residents f othercountries, ndourdataset wouldnotpicktheseup.Still,astheseerrorsall in theregressandf ourmodel heyonlymake he effectof tradeharder o find and do not appearo introduce nybias issues.6Thesedataareavailable ia the Internet t:http://www.bis.org/publ/qcsvO206/hanx9b.csvndarepartof theInternationalankingStatisticspublished egularlyn the BISQuarterlyReview.For technical ea-sons we usually gnorea few observationsromIreland ndSpain;adding hesemakes ittledifferencengeneral o our results.

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Table 1. OLSEstimatesof Effectof Tradeon Claims

Default 0.54 (0.04)Without ontrols 0.75 (0.02)Levels 0.0001 (0.00003)Levels without ontrols 0.0001 (0.00003)1990 0.51 (0.05)1995 0.53 (0.07)Onlyindustrial ebtors 0.74 (0.04)

Equation stimated s Claimsi,,= (pTradei,,,SXijt + Eijt.Robust tandard rrors clustered y country-pairs)ecordedn parentheses.Interceptsndyeareffects not recorded.

(The creditorcountries and debtor countries are listed in the appendix.)The dataare provided semi-annuallyfrom 1986; we averagethe data to annualseries bysimple averaging.We convert nominalbankclaims to a real seriesby deflatingbythe U.S. CPI(1982-1984 = 1).Almost half theclaims arereported o be zero. Thismakes the log transformation otentiallyimportantand questionable;we investi-gate it furtherbelow.The most important egressor s the level of international rade.We use bilat-eral trade lows takenfrom theIMF'sDirectionof TradeStatisticsdataset,deflatedby the U.S. CPI.7To this we addpopulationandreal GDP data (in constant dol-lars).8Weexploit the CIA'sWorldFactbook or a numberof country-specificvari-ables. These include: atitudeand ongitude, andarea, andlockedand slandstatus,physicallycontiguousneighbors, anguage,colonizers,and dates of independence.We use these to creategreat-circledistanceand our other controls.We obtain datafrom the WorldTradeOrganizationo create an indicatorof regionaltradeagree-ments,and we include:EEC/EC/EU,US-IsraelFTA, NAFTA,CACM, CARICOM,PATCRA,ANZCERTA,ASEAN, SPARTECA,and Mercosur.Finally,we add theGlick andRose (2002) currencyuniondummyvariable.Descriptivestatistics for the data set are tabulated n the appendix.ResultsWe begin our investigation by estimating equation (12) with OLS. Our resultsappear n Table 1.

7Bilateralradeon FOBexportsandCIF mportss recordedn U.S. dollars;we deflate radeby theU.S. CPI.We createanaveragevalue of bilateral radebetweena pairof countriesby averaging ll of thefourpossiblemeasurespotentially vailable.8Whereverossible,we use WorldDevelopmentndicators taken rom the WorldBank'sWDI2000CD-ROM)data.When hedataareunavailablerom he WorldBank,we fill in missingobservationswithcomparablesromthe PennWorldTableMark5.6, and(whenall else fails)fromtheIMF's nternationalFinancialStatistics.The serieshave been checkedandcorrectedorerrors.

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Andrew K.Rose and MarkM.SpiegelOurdefault estimates include the entire set of regressors(i.e., all 14 coeffi-cients areestimated,as well as the set of time-specific intercepts).In this specifi-cation, the estimate of the all-important p coefficient is 0.54, with a robuststandard rrorof 0.04. This elasticity is not only consistent with ourtheory,but is

highly significant.With a t-statistic of over 15, the coefficient is different fromzero at any reasonable evel of statisticalsignificance.The effect is also econom-ically significant;an increasein tradeof 1 percentis associated with an increasein bilaterallending of over 0.5 percent,all other things being equal. Of course,since there arecapitalflows above andbeyondthe banklendingthatwe consider(through,for example, stock and bond markets,as well as foreign direct invest-ment), even this considerableelasticity should probablybe considered a lowerbound.The rest of the tableprovidesa series of robustnesschecks. For instance,thesecond row reports pif the other controlsaredropped rom the equation(i.e., weset 3= y = 0); in this case, the effect is even more significant.Since many of thecreditorcountries have not extended loans to some of the debtorcountries,manyobservationsof the dependentvariable are zero and are thus droppedfrom theequationestimatedin natural ogarithms.Therefore,the thirdand fourth rows ofthe table report comparableestimatesof (p when both tradeand bank claims areincluded in untransformedevels. Yet(premainsstatisticallysignificantwhen thekey relationship s estimated n levels.9The fifth and sixth rows of the table move away from panel dataanalysis tocover only cross sections for two years in the middle of the sample, 1990 and1995. However, the results are essentially unchangedfrom the default specifica-tion. The seventh and final row includes only observationsbetween industrialcountries(i.e., those withIFS countrycodes less than200). If anything, he resultsbecome mysteriouslylarger; hey certainlyremainpositive andhighly significantin both the economic and statisticalsenses.'0To summarize, he effect of international radeon bank claims seems positive,significant, and robust in simple OLS estimation.The question is whether thisresult standsup to greatereconometricscrutiny.

III.ResultsWe now proceed to instrumentalvariablesestimation.We use five instrumentalvariables for (the log of) trade:(the log of) distance between the countries;theland borderdummy;the number of landlockedcountries;the number of islandnations;and the log of the productof the countries'area. We accordinglyset theappropriate coefficients to zero (i.e., dropthem from the equation, leaving theremainingvariables as controls).The estimates are tabulated n Table 2a.Despite the use of instrumentalvariables that are both plausibly exogenousand correlatedwith trade,the key results do not change with IV estimation. The

9Box-Cox ests mply hat he naturalogarithmicransformations quitereasonable, nd hat he eveltransformations rejectedn favorof thelog transform.10Thoughf we includeonly developingcountryborrowers, ur estimateremains ignificantat 0.53(standardrrorof 0.04).

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Table 3. IVEstimatesof Effectof Trade on Claims,Controlling orTotalClaims/DebtControl TotalClaims TotalDebtDefault 0.40 (0.07) 0.42 (0.07)Without ontrols 0.42 (0.04) 0.27 (0.04)Levels 0.00005(0.000004) 0.00006(0.00002)Levels without ontrols 0.00005 (0.000006) 0.00006(0.00002)1990 0.47 (0.10) 0.56 (0.09)1995 0.37 (0.10) 0.42 (0.10)Onlyindustrial ebtors 0.48 (0.23) 1.10(0.20)OLS 0.29 (0.03) 0.39 (0.02)

Equation estimated is Clainmsij.= (pTradeij,t pWij,t+ i.j,t.Robust tandardrrors clustered y country-pairs)ecordedn parentheses.Interceptsndyeareffects not recorded.Instrumentalariables or tradeare:distance;andborder; umberandlocked; umber f islandnations;og of area.

The middle column of Table3 adds a control for the (log of the) total creditextended by the creditorcountry,as suggested by our theoreticalanalysis; theright-hand olumn controls for the (log of) total debt incurredby the debtorcoun-try. Again, the results remaineconomically and statisticallysignificant.Finally,Table4 reportsresults whenpanelestimatorsare used insteadof moretraditional egressions.The middle columnsreportOLS fixed- andrandom-effectsestimates of (p for a variety of different specifications. The former takes intoaccount all country-pairactors that influence tradewhethermeasuredor not, andis thus an exceptionally good robustness check. The right-handcolumn reportsinstrumental ariablesestimatesusing a randomeffects estimator thefixed-effectestimator is infeasible since the geographic variables are time-invariant).Yetdespite all the econometricfirepower, he estimate of (premainssignificant; t hasa t-statistic of almost9 andan economically largeeffect.13We conclude that ourhypothesisthat bank credit is extended across interna-tional bordersalong the lines of international rade s corroborated.

IV.SummaryIt is plausibleto believe that countries service theirforeigndebts at least in parttoavoid thereducedtrade hattypicallyfollows international efault.If so, sovereignborrowerswill enjoy superiorcreditterms from creditorcountries for which this

13Lending aybe motivated y servicingFDI,rather han hesovereign isk ssuesconsideredn thetheoryabove. Totestthis,we add a control n the formof the naturalogarithm f FDIsourced romthecreditor ountry.We obtained he bilateralFDI data fromthe OECD'sInternationalDirectInvestmentsYearbook 980-2000. This dataset is annualand unavailable ormanycountriesn oursample,contain-ing only some 2,600 observations.When we add this control o our defaultIV regression in logs, withcontrols) ts coefficient s indeedpositiveandsignificant.Still, the log of traderetainsan economicallyandstatistically ignificant oefficientof 0.62 (witha robust tandard rrorof 0.11).

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Table4. IVEstimatesof Effectof Trade Levelon Claims, Panel EstimatorsEstimator OLS,RE OLS,FE IV,REDefault 0.31 (0.01) 0.19 (0.02) 0.52 (0.06)Without ontrols 0.38 (0.01) 0.19 (0.01) 0.52 (0.03)Levels 0.00003(0.000001) 0.00002(0.000001) 0.00006(0.00001)Levels without ontrols 0.00003(0.000001) 0.00002 (0.000001) 0.00007(0.000003)Onlyindustrial ebtors 0.46 (0.06) 0.28 (0.07) 0.96 (0.19)

Equation estimated is Claiinsij,, = (pTradei,,+ 3Wi,.t+ Eij.Robust tandard rrors clustered y country-pairs)ecordedn parentheses.Intercepts ndyeareffects not recorded.Instrumentalariables or tradeare:distance;andborder; umberandlocked; umber f islandnations;og of area.

penaltyis disproportionately igh. In this paperwe have provideda simple theo-reticalmodel thatformalizesthis intuition.We have also empirically nvestigatedand confirmedthe hypothesisthat international radepatternsdeterminelendingpatterns.In futurework it would be interesting o extend this analysisto other forms ofinternationalending,above andbeyondbank loans. We think this is a good placeto pass the torch to others.

APPENDIXDescriptiveStatistics

Sample Mean Std.Dev. Min MaxClaims 31,787 561 3529 0 146061Logreal claims 19,769 3.69 2.53 -1.20 11.5Logreal trade 28,809 11.6 2.81 -0.55 20.3Controls:Logdistance 28,809 8.32 0.59 5.37 9.41Logreal GDP 25,126 49.6 2.50 42.3 58.0Logreal GDPper capita 25,102 17.3 1.07 14.1 21.1Common andborder 28,809 0.003 0.053 0 1Common anguage 28,809 0.173 0.379 0 1Log areas 28,809 23.8 3.25 12.20 32.3Number andlocked 28,809 0.286 0.496 0 2Number f islands 28,809 0.301 0.489 0 2Regional radeagreement 31,787 0.009 0.094 0 1Same nation 28,809 0.003 0.054 0 1Colonialhistory 28,809 0.051 0.221 0 1Currentolony 28,809 0.003 0.057 0 1Currency nion 28,809 0.003 0.055 0 1

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AndrewK.Roseand MarkM.SpiegelCreditor Countries with Claims Reported

United StatesDenmarkNetherlandsJapanIreland

United KingdomFranceSwitzerlandFinlandMalta

AustriaGermanySwedenGreecePortugal

BelgiumItalyCanadaIcelandSpain

Debtor Countries with Claims ReportedAfghanistan, Islamic State ofAlbaniaAlgeriaAngolaArgentinaAustraliaBahamas, TheBahrainBangladeshBarbadosBelizeBeninBermudaBhutanBoliviaBotswanaBrazilBrunei DarussalamBulgariaBurkina FasoBurundiCambodiaCameroonCape VerdeCayman IslandsCentral African RepublicChadChileChinaColombiaComorosCongo, Dem. Rep. ofCongo, Rep. ofCosta RicaC6te d'IvoireCubaCyprusDjiboutiDominicaDominican Republic

EcuadorEgyptEl SalvadorEquatorialGuineaEthiopiaFalkland IslandsFijiFrench PolynesiaGabonGambia, TheGhanaGibraltarGreeceGrenadaGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasHong Kong SARHungaryIcelandIndiaIndonesiaIran, Islamic Republic ofIraqIsraelJamaicaJordanKenyaKiribatiKorea, Rep. ofKuwaitLaosLebanonLesothoLiberiaLibyaMacau SAR

MadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMongoliaMoroccoMozambiqueMyanmarNamibiaNauruNepalNetherlands AntillesNew CaledoniaNew ZealandNicaraguaNigerNigeriaOmanPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalQatarRomaniaRwandaSao Tome and PrincipeSaudi ArabiaSenegalSeychellesSierra LeoneSingapore

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Solomon IslandsSomaliaSouth AfricaSri LankaSt. LuciaSt. VincentSt. HelenaSudanSurinamSwaziland

Syrian Arab RepublicTanzaniaThailandTogoTongaTrinidad and TobagoTunisiaTurkeyUgandaUnited Arab Emirates

UruguayVanuatuVenezuela, Reptiblica Bolivariana deVietnamWestern SamoaYemen, Republic ofYugoslavia, Federal Republic ofZambiaZimbabwe

REFERENCESBulow,Jeremy,and KennethRogoff, 1989a,"AConstantRecontractingModel of SovereignDebt," Journal of Political Economy, Vol. 97, No. 1, pp. 155-78.

, 1989b,"SovereignDebt: s toForgive oForget?" mericanEconomicReview,Vol.79,No. 1,pp.43-50.Cline, William R., 1987, Mobilizing Bank Lending to Debtor Countries (Washington:InstituteforInternationalconomics).Eaton,Jonathan,ndMarkGersovitz,1981,"Debtwith PotentialRepudiation: heoretical ndEmpiricalAnalysis,"Reviewof EconomicStudies,Vol. 48 (April),pp.289-309.Glick,Reuven,andAndrewK.Rose,2002, "Does a CurrencyUnionAffect Trade?" uropeanEconomicReview,Vol.46, No. 6, pp. 1125-51.Kehoe,TimothyJ., and DavidK.Levine, 1993,"Debt-ConstrainedssetMarkets," eviewofEconomic Studies, Vol. 60, pp. 865-88.Kletzer,KennethM., and BrianD. Wright,2000, "SovereignDebtas Intertemporalarter,"American Economic Review, Vol. 90, No. 3, pp. 621-39.Ozler,Sule, 1993, "HaveCommercialBanksIgnoredHistory?"AmericanEconomicReview,Vol.83, No. 3, pp.608-20.Rose, Andrew K., 2002, "One Reason CountriesPay Their Debts: RenegotiationandInternational rade,"NBERWorkingPaper8853 (Cambridge,Massachusetts:NationalBureauof EconomicResearch).Wright, Mark L.J., 2002, "Reputationsand Sovereign Debt" (unpublished;Palo Alto,

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