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Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors

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  • Leonardo Bartolini

    (International Monetary Fund)

  • Avinash Dixit

    (International Monetary Fund)

Abstract

We develop a formula for the market value of debt when the borrower's repayment capacity varies stochastically and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of this curve are examined in response to changes in the underlying parameters. The calculations bring out conflicts of interest among lenders of differing degrees of seniority. Most surprisingly, junior creditors gain when the loan is rescheduled on terms more favorable to the debtor.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 38 (1991)
Issue (Month): 4 (December)
Pages: 828-849

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Handle: RePEc:pal:imfstp:v:38:y:1991:i:4:p:828-849

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Cited by:
  1. Miller, Marcus & Zhang, Lei, 1998. "Sovereign Liquidity Crises: the Strategic Case for a Payments Standstill," CEPR Discussion Papers 1820, C.E.P.R. Discussion Papers.
  2. Michael Dooley & Mark R. Stone, 1993. "Endogenous Creditor Seniority and External Debt Values," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 395-413, June.
  3. Hayri, Aydin, 1997. "Debt Relief," CEPR Discussion Papers 1701, C.E.P.R. Discussion Papers.
  4. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "Pricing average price options for the 1990 Mexican and Venezuelan recapture clauses," Policy Research Working Paper Series 541, The World Bank.
  5. Michael Bowe & James W. Dean, 1997. "Debt-equity swaps and the enforcement of sovereign loan contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(1), pages 59-83.
  6. Westermann, Frank & Steinkamp, Sven, 2013. "On Creditor Seniority and Sovereign Bond Prices in Europe," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79848, Verein für Socialpolitik / German Economic Association.
  7. Pierre Mella-Barral & Pierre Tychon, 1996. "Default Risk in Asset Pricing," FMG Discussion Papers dp250, Financial Markets Group.
  8. Loredana Ureche-Rangau & Kim Oosterlinck, 2005. "Entre la peste et le choléra : le détenteur d’obligations peut préférer la répudiation au défaut…," Revue d'Économie Financière, Programme National Persée, vol. 79(2), pages 309-331.
  9. Claessens, Stijn & Pennacchi, George, 1992. "Deriving developing country repayment capacity from the market prices of sovereign debt," Policy Research Working Paper Series 1043, The World Bank.
  10. Cohen, Daniel, 1996. "The sustainability of African debt," Policy Research Working Paper Series 1621, The World Bank.

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