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Investment Incentives: New Money, Debt Relief, and the Critical Role of Conditionality in the Debt Crisis

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  • Claessens, Stijn
  • Diwan, Ishac

Abstract

External debt depresses investment and lowers economic growth below its potential through its negative effect on liquidity and expected profitability. These effects can pull a country into a downward spiral in which both the debtor country and creditors lose. This article considers the possibilities for revising contracts between a debtor and its creditors once a debt crisis has erupted. The framework that we develop shows how various combinations of new money and cuts in debt and debt service affect a debtor country's welfare, its debt repayments, and the earnings of its creditors. The analysis distinguishes between debtor countries that are willing and able to precommit credibly to an adjustment program and those that are not. This distinction provides the basis for a discussion of conditional lending by the international financial institutions to provide incentives and sanctions that make credible a debtor's promises to invest. Copyright 1990 by Oxford University Press.

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Bibliographic Info

Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 4 (1990)
Issue (Month): 1 (January)
Pages: 21-41

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Handle: RePEc:oup:wbecrv:v:4:y:1990:i:1:p:21-41

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Cited by:
  1. Gode, Constantino J., 2001. "Sovereign Debt and Uncertainty in the Mozambican Economy," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," Boston University - Institute for Economic Development 59, Boston University, Institute for Economic Development.
  3. Claessens, Stijn, 1993. "Alternative Forms of External Finance: A Survey," World Bank Research Observer, World Bank Group, vol. 8(1), pages 91-117, January.
  4. Marcel Fafchamps, . "Sovereign Debt, Structural Adjustment and Conditionality," Working Papers 96015, Stanford University, Department of Economics.
  5. Beetsma, Roel & Mavromatis, Konstantinos, 2012. "An Analysis of Eurobonds," CEPR Discussion Papers 9244, C.E.P.R. Discussion Papers.
  6. Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
  7. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.
  8. Stephen Easton & Duane Rockerbie, 1999. "Does IMF conditionality benefit lenders?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(2), pages 347-357, June.

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