Political risk, incentives and international credit market equilibrium

Abstract

The present article discusses some important issues, dealt with in the literature, which are concerned with the problems faced by emerging economies in the international credit market. Initially, the incentives that encourage international investors to lend are investigated, with special emphasis on the portfolio diversification theory. Next, the incentives that encourage the emerging economies to borrow, and also those that lead to debt servicing, are addressed, with special emphasis on the theory of reputational equilibrium.