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Debt Relief and Secondary Market Discount

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  • Cohen, Daniel

Abstract

This paper analyzes the inefficiency that arises from a debt overhang. In order to define the lenders' optimal rescheduling strategy, I calculate the maximum present discounted value of the repayment they could obtain. This upper bound occurs when the borrower gives up sovereignty over all decisions except to default. To secure the maximum, however, the lenders do not simply extract a payment equal to the cost of default, but allows the country to invest more. The maximum present discounted value return coincides with the equilibrium market value of the debt. Rather than a debt write-off, the key to an efficient rescheduling process is a clear commitment from the lenders that the flow of resources they will ask the debtor to transfer will reflect the secondary market discou.

Suggested Citation

  • Cohen, Daniel, 1989. "Debt Relief and Secondary Market Discount," CEPR Discussion Papers 312, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:312
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    Cited by:

    1. Siebert, Horst, 1990. "Wege aus der Verschuldungskrise," Kiel Working Papers 435, Kiel Institute for the World Economy (IfW Kiel).
    2. Nunnenkamp, Peter, 1989. "Capital drain, debt relief, and creditworthiness of developing countries," Kiel Working Papers 379, Kiel Institute for the World Economy (IfW Kiel).

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