Insufficient national creditworthiness

The external debt of many countries is large and growing rapidly. Without doubting the solvency or good faith of the issuer, bond-holders may legitimately wonder whether the foreign exchange will be available to service any loan. The larger a country's debt servicing requirements relative to its foreign exchange earnings, the more vulnerable it is to default in the face of sharp unexpected declines in earnings or increases in import requirements. Uncertainties concerning the attitudes of present or future governments of a country before the maturity of a debt may also cause potential lenders to hesitate to buy bonds issued even by a highly respected borrower, for future payments of interest and amortization could be put in jeopardy by official action.

The creditworthiness of a country is largely determined by its standing with the IMF, especially in the case of debtor countries where negotiations with other donors are underpinned by IMF programmes. Perceptions of reduced creditworthiness of such countries prompt commercial banks to withhold new financing and in many cases to reduce their net claims on poorer debtor countries.