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Debt Relief

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Hayri, Aydin

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Abstract

This paper develops a model for pricing sovereign debt under continuous time uncertainty, allowing creditors to carry out debt reductions. Focusing on the sovereign’s willingness to pay rather than on their ability to pay, it models debt reductions as a non-cooperative game. The formulae derived from the model successfully predict the outcomes of the Brady debt relief deals. The model also predicts that the sovereign will get a positive share of the surplus generated by the debt reductions and that the country will be on the ‘wrong’ side of its Debt Laffer curve well before the debt reduction.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1701.

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Date of creation: Oct 1997
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Handle: RePEc:cpr:ceprdp:1701

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Related research
Keywords: Brady deals; Continuous-time uncertainty real options; Debt Reduction; Debt Relief;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

Cited by:
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  1. Mella-Baral, Pierre & Tychon, Pierre, 1996. "Default risk in asset pricing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  2. Ajit Singh & Ann Zammitt, 2003. "Globalisation, labour standards and economic development," ESRC Centre for Business Research - Working Papers wp257, ESRC Centre for Business Research. [Downloadable!]
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This page was last updated on 2009-11-25.

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