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Debt Relief: Implications of Secondary Market Discounts and Debt Overhangs

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  • Cohen, Daniel

Abstract

An efficient rescheduling of the debt must take into account the market value of the debt. I argue here that the appropriate approach is not to write down the debt to its value on the secondary market, but to scale the flows of payments on the debt. The key to an efficient rescheduling is to offer debt relief reflecting the market discount, where the reliefs is contingent upon the country's adjustment effort ( rather than setting repayment terms "once and for all" as in the Brady plan). I propose, as an example, that stabilization or adjustment programs under the aegis of the International Monetary Fund or the World Bank could include provisions allowing debt servicing or repurchase for a set duration at the secondary market rate. This would both reflect and provide incentives to increase a country's ability to repay. 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: 43-53

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Handle: RePEc:oup:wbecrv:v:4:y:1990:i:1:p:43-53

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Cited by:
  1. Danny Cassimon & Marin Ferry & Marc Raffinot & Bjorn Van Campenhout, 2013. "Dynamic fiscal impact of the debt relief initiatives on african heavily indebted poor countries (HIPCs)," Working Papers DT/2013/01, DIAL (Développement, Institutions et Mondialisation).
  2. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 03/175, International Monetary Fund.
  3. Goopu, Sudarshan, 1996. "The analysis of emerging policy issues in development finance," Policy Research Working Paper Series 1589, The World Bank.
  4. Marcel Fafchamps, . "Sovereign Debt, Structural Adjustment and Conditionality," Working Papers 96015, Stanford University, Department of Economics.
  5. Berthelemy, Jean-Claude, 2001. "HIPC Debt Relief and Policy Reform Incentives," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Oladi, Reza, 2003. "International involuntary lending and contingent default threat," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 237-245.
  7. Sawada, Yasuyuki, 2001. "Secondary market efficiency for LDC bank loans and international private lending, 1985-1993," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 549-562, August.
  8. Van Campenhout, Bjorn & Raffinot, Marc & Ferry, Marin & Cassimon, Danny, 2013. "Dynamic Fiscal Impact of The Debt Relief Initiatives on African Highly Indebted Poor Countries (HIPCs)," Economics Papers from University Paris Dauphine 123456789/10905, Paris Dauphine University.
  9. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.

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