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A valuation formula for LDC debt

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  • Cohen, Daniel

Abstract

A large gap may lie between the amount of debt relief that is nominally granted to a debtor and that which is actually given up by the creditors. To help put that gap in perspective, the author proposes a valuation formula that provides: (i) the price at which a buy-back of the debt, on the secondary market, is advantageous to the country; (ii) the value to creditors of having the flows of payment guaranteed against factors that hinder a country in servicing its debt; and (iii) the degree of tradeoff between growth of payments and levels of payments. The author argues that it is not good business for a country to announce its intention to buy back debt, because doing so immediately raises the price. The value of guarantees, the author argues, cannot exceed 25 percent of the market price of the debt. Typically they're worth only about 10 percent. As for the degree of tradeoff, the author's formula finds that 1 percent additional growth rate is worth a 15 percent increase in the flows of payments. An assessment of the Mexican debt-relief agreement reached in 1990 is also offered.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 34 (1993)
Issue (Month): 1-2 (February)
Pages: 167-180

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Handle: RePEc:eee:inecon:v:34:y:1993:i:1-2:p:167-180

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
  2. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "Secondary Market Prices Under Alternative Debt Reduction Schemes: An Option Pricing Approach with an Application to Mexico," CEPR Discussion Papers 415, C.E.P.R. Discussion Papers.
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Cited by:
  1. Kim Oosterlinck & Loredana Ureche-Rangau, 2005. "Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut," ULB Institutional Repository 2013/6693, ULB -- Universite Libre de Bruxelles.
  2. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "An option - pricing approach to secondary market debt : applied to Mexico," Policy Research Working Paper Series 333, The World Bank.
  3. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  4. Loredana Ureche-Rangau & Kim Oosterlinck, 2005. "Entre la peste et le choléra : le détenteur d’obligations peut préférer la répudiation au défaut…," Revue d'Économie Financière, Programme National Persée, vol. 79(2), pages 309-331.
  5. Hayri, A., 1996. "Debt Relief," The Warwick Economics Research Paper Series (TWERPS) 459, University of Warwick, Department of Economics.
  6. van Wijnbergen, Sweder, 1990. "Mexico's external debt restructuring in 1989-90," Policy Research Working Paper Series 424, The World Bank.
  7. Ramcharran, Harri, 1999. "The determinants of secondary market prices for developing country loans: the impact of country risk," Global Finance Journal, Elsevier, vol. 10(2), pages 173-186.

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