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Forgiveness, Buybacks, and Exit Bonds: An Analysis of Alternate Debt Relief Strategiest

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  • AASIM MAIRAJ HUSAIN

    (Pennsylvania University, USA)

Abstract

The 1980s have seen the issue of Third World debt rise to prominence as one of the foremost concerns for economic policy-makers. The foreign indebtedness of many developing countries has risen to such high levels that the casual observer is forced to wonder if the debt will ever be paid back. Many scholars are now arguing that the debt obligations of some of the most heavily indebted countries (HICs)are so largethat they act as a severedisincentiveto investment.1 Thesedisincentives, in turn, ,reduce growth rates in the HICs, thereby making future repayments even lesslikely. Many explanations for the onslaught of the debt crisishave been offered. The late Seventiesand early Eighties saWa rapid rise in interest rates as well as an equally rapid deterioration of the terms of trade of many HICs. Many sovereign debtors, which had been excellent investment opportunities for creditor banks, were suddenly insolvent. Low output shocks further exacerbated repayment possibilities. Faced with the possibility of non-payment, creditors entered into rescheduling negotiations with sovereign borrowers. These reschedulings have involved bargaining over the amount of repayment that will be made. Unlike domestic borrowers, sovereign debtors do not face bankruptcy proceedings and the liquidation of their assets in the event of a default. What motivation, then, does a sovereign debtor have to repay its debt? Furthermore, why do banks lend to sovereigndebtors in the first place? Eaton and Gersovitz (1981) suggest that international borrowing is a repeated game in which default imposes a cost in terms of future access to capital markets.

Suggested Citation

  • Aasim Mairaj Husain, 1988. "Forgiveness, Buybacks, and Exit Bonds: An Analysis of Alternate Debt Relief Strategiest," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(4), pages 819-828.
  • Handle: RePEc:pid:journl:v:27:y:1988:i:4:p:819-828
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    References listed on IDEAS

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    1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    2. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    3. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    4. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    5. Cohen Daniel, 1988. "Is the discount on the secondary market a case for ldc debt relief ?," CEPREMAP Working Papers (Couverture Orange) 8823, CEPREMAP.
    6. W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
    7. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
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