AbstractThis 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1701.
Date of creation: Oct 1997
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Other versions of this item:
- Hayri, A., 1996. "Debt Relief," The Warwick Economics Research Paper Series (TWERPS) 459, University of Warwick, Department of Economics.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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