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The Price of LDC Debt

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  • Cohen, Daniel
  • Portes, Richard

Abstract

We study the behaviour of secondary market prices for the debt of seven LDCs for the period March 1986 through November 1989 (monthly data). These prices for long-term debt appear to be driven by a set of `common factors' across countries. One of these is the interest rate, Libor; we found a unit elasticity w.r.t. Libor for the average (across countries) price and for pooled data. The other `common factors' are not correlated with world macro variables, and we call these factors common only to the indebted countries the `systemic risk'. We then study the price of long-term debt relative to that of short-term debt (data for three major countries). The price of short-term debt is influenced neither by `systemic risk' nor by economic factors specific to the debtor country; we conjecture it is driven by local political risk. The results suggest that when it is serviced, long-term debt payments reflect the country's resources (export prices). The decision to service is contingent upon servicing short-term debt and on `systemic risk', which appears not to be a risk of `once-for-all' default but rather a milder form that simply alters on a period-by-period basis, but never irrevocably, the incentive of debtors to service their debt.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 459.

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Date of creation: Sep 1990
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Handle: RePEc:cpr:ceprdp:459

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Keywords: LDC Debt; Secondary Market; Systemic Risk;

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Cited by:
  1. Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
  2. 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.
  3. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth, 1996. "Is the Debt Crisis History? Recent Private Capital Inflows to Developing Countries," World Bank Economic Review, World Bank Group, vol. 10(1), pages 27-50, January.
  4. Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
  5. Gooptu, Sudarshan & Martinez Peria, Maria Soledad, 1992. "Factors that affect short-term commercial bank lending to developing countries," Policy Research Working Paper Series 886, The World Bank.

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