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Debt rescheduling and the choice between bonds and loans for LDCs' foreign debt

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  • Edward Chow
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    Abstract

    This paper examines less developed country (LDC) borrowers' choice of financing methods. I devleop and test the hypothesis that ex-ante consideration of rescheduling affects LDC borrowers' choice between bonds and commercial loans. Banks can monitor and distinguish between permanent and temporary shocks, while bondholders cannot. Therefore, debt rescheduling based on the nature of economic shocks is feasible with loan financing. Our empirical findings indicate the debt rescheduling is considered exante in LDC lending. In addition, default risk and contract size affect the choice of financing instruments. Copyright Kluwer Academic Publishers 1994

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    File URL: http://hdl.handle.net/10.1007/BF01000484
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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 5 (1994)
    Issue (Month): 2 (March)
    Pages: 139-157

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    Handle: RePEc:kap:openec:v:5:y:1994:i:2:p:139-157

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    Web page: http://www.springerlink.com/link.asp?id=100323

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    Keywords: bonds; loans; permanent shock; temporary shock; debt rescheduling/reduction;

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    1. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    2. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
      • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
    3. Schmidt, Reinhart, 1984. "Early warning of debt rescheduling," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 357-370, June.
    4. Feder, Gershon & Just, Richard & Ross, Knud, 1981. "Projecting Debt Servicing Capacity of Developing Countries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(05), pages 651-669, December.
    5. Lee, Suk Hun, 1991. "Ability and willingness to service debt as explanation for commercial and official rescheduling cases," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 5-27, February.
    6. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
    7. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
    8. Frank, Charles Jr. & Cline, William R., 1971. "Measurement of debt servicing capacity: An application of discriminant analysis," Journal of International Economics, Elsevier, vol. 1(3), pages 327-344, August.
    9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    10. Sachs, Jeffrey D, 1990. "A Strategy for Efficient Debt Reduction," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 19-29, Winter.
    11. James, Christopher, 1989. "Empirical evidence on implicit government guarantees of bank foreign loan exposure," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 30(1), pages 129-162, January.
    12. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    13. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
    14. Berlin, Mitchell & Loeys, Jan, 1988. " Bond Covenants and Delegated Monitoring," Journal of Finance, American Finance Association, vol. 43(2), pages 397-412, June.
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