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Debt relief

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  • Hayri, Aydin

Abstract

This paper develops a model for pricing sovereign debt under continuous time uncertainty, allowing creditors to carry out debt reductions. Focusing on the sovereign’s willingness to pay rather than on their ability to pay, it models debt reductions as a non-cooperative game. The formulae derived from the model successfully predict the outcomes of the Brady debt relief deals. The model also predicts that the sovereign will get a positive share of the surplus generated by the debt reductions and that the country will be on the ‘wrong’ side of its Debt Laffer curve well before the debt reduction.

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Bibliographic Info

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

Volume (Year): 52 (2000)
Issue (Month): 1 (October)
Pages: 137-152

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Handle: RePEc:eee:inecon:v:52:y:2000:i:1:p:137-152

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

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References

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  1. Cohen, Daniel, 1991. "A valuation formula for LDC debt," Policy Research Working Paper Series 763, The World Bank.
  2. Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.
  3. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  4. Kenneth A. Froot, 1988. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," NBER Working Papers 2675, National Bureau of Economic Research, Inc.
  5. Claessens, Stijn & Diwan, Ishac, 1994. "Recent experience with commercial bank debt reduction: Has the "menu" outdone the market?," World Development, Elsevier, vol. 22(2), pages 201-213, February.
  6. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  7. Diwan, Ishac & Spiegel, Mark M., 1991. "Are buybacks back? Menu-driven debt-reduction schemes with heterogenous creditors," Policy Research Working Paper Series 675, The World Bank.
  8. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 109-126, March.
  9. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank.
  10. Leonardo Bartolini & Avinash K. Dixit, 1990. "Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors," IMF Working Papers 90/88, International Monetary Fund.
  11. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  12. Claessens, Stijn & van Wijnbergen, Sweder, 1993. "The 1990 Mexico and Venezuela recapture clauses: An application of average price options," Journal of Banking & Finance, Elsevier, vol. 17(4), pages 733-745, June.
  13. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  14. Claessens, Stijn, 1990. "The debt laffer curve: Some estimates," World Development, Elsevier, vol. 18(12), pages 1671-1677, December.
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Cited by:
  1. Pascal François & Georges Hübner & Jean-Roch Sibille, 2011. "A Structural Balance Sheet Model of Sovereign Credit Risk," Cahiers de recherche 1141, CIRPEE.
  2. Michael WESTPHALEN, 2002. "Valuation of Sovereign Debt with Strategic Defaulting and Rescheduling," FAME Research Paper Series rp43, International Center for Financial Asset Management and Engineering.
  3. Ajit Singh & Ann Zammitt, 2003. "Globalisation, labour standards and economic development," ESRC Centre for Business Research - Working Papers wp257, ESRC Centre for Business Research.
  4. Mella-Baral, Pierre & Tychon, Pierre, 1996. "Default risk in asset pricing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Andrade, Sandro C., 2009. "A model of asset pricing under country risk," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 671-695, June.

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