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Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries

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  • Eduardo Levy Yeyati

Abstract

According to reputation models of sovereign debt, the incentives to repay are proportional to the income insurance benefits provided by access to international markets. This paper, however, documents that private net lending to developing countries exhibits a procyclical or acyclical pattern, contradicting this premise. By contrast, official debt net flows exhibit a countercyclical patter. In addition, the paper shows that (both current and past) defaults are associated with lower net debt flows. The findings, which are robust to various additional controls, cast doubt on the reputation view of sovereign debt markets. At the same time, they suggest that reputation may account for the success of the (implicit) preferred creditor status enjoyed by multilateral lenders.
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  • Eduardo Levy Yeyati, 2009. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Open Economies Review, Springer, vol. 20(4), pages 489-507, September.
    • Handle: RePEc:kap:openec:v:20:y:2009:i:4:p:489-507
    DOI: 10.1007/s11079-008-9086-4
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    Cited by:

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    2. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics,, University of Munich, Department of Economics.
    3. repec:dgr:rugsom:13010-eef is not listed on IDEAS
    4. Avellán, Leopoldo & Galindo, Arturo J. & Lotti, Giulia, 2021. "Sovereign external borrowing and multilateral lending in crises," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 206-238.
    5. Michael Tomz & Mark L.J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 247-272, May.
    6. Jeffrey Frankel & Ben Smit & Federico Sturzenegger, 2006. "South Africa: Macroeconomic Challenges after a Decade of Success," CID Working Papers 133, Center for International Development at Harvard University.
    7. Galindo, Arturo J. & Panizza, Ugo, 2018. "The cyclicality of international public sector borrowing in developing countries: Does the lender matter?," World Development, Elsevier, vol. 112(C), pages 119-135.
    8. Levy Yeyati, Eduardo, 2008. "The cost of reserves," Economics Letters, Elsevier, vol. 100(1), pages 39-42, July.
    9. Fernández-Arias, Eduardo, 2010. "Multilateral Safety Nets for Financial Crises," IDB Publications (Working Papers) 1508, Inter-American Development Bank.
    10. María Bru Muñoz, 2023. "The forgotten lender: the role of multilateral lenders in sovereign debt and default," Working Papers 2301, Banco de España.
    11. Cordella, Tito & Powell, Andrew, 2021. "Preferred and non-preferred creditors," Journal of International Economics, Elsevier, vol. 132(C).
    12. Yeyati, Eduardo Levy & Panizza, Ugo, 2011. "The elusive costs of sovereign defaults," Journal of Development Economics, Elsevier, vol. 94(1), pages 95-105, January.
    13. Wilfredo L. Maldonado & Jorge Guillén & Jussara Ribeiro, 2021. "An international reserves variation threshold to increase loan funding," International Economics and Economic Policy, Springer, vol. 18(2), pages 247-265, May.
    14. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    15. Galindo, Arturo & Avellán, Leopoldo & Gómez, Tomás & Lotti, Giulia, 2022. "The Cyclicality of Official Bilateral Lending: Which Cycle do Flows Follow?," IDB Publications (Working Papers) 12643, Inter-American Development Bank.
    16. Avellán, Leopoldo & Galindo, Arturo J. & Lotti, Giulia, 2022. "Following public finances: The mirage of MDBs countercyclicality," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 372-385.
    17. Duygun, Meryem & Ozturk, Huseyin & Shaban, Mohamed, 2016. "The role of sovereign credit ratings in fiscal discipline," Emerging Markets Review, Elsevier, vol. 27(C), pages 197-216.
    18. Eduardo Levy Yeyati, 2009. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Open Economies Review, Springer, vol. 20(4), pages 489-507, September.
    19. Eduardo Levy Yeyati, 2023. "Sovereign Debt Management," Working Papers 265, Red Nacional de Investigadores en Economía (RedNIE).
    20. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies: How Much is theprivate Sector Affected?," IMF Working Papers 2009/029, International Monetary Fund.
    21. Boonman, Tjeerd M., 2013. "Sovereign defaults, business cycles and economic growth in Latin America, 1870-2012," Research Report 13010-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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    More about this item

    Keywords

    Sovereign debt; Capital flows; Debt default; E6; F3; F4; G1;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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