Sovereign Debt: A Primer
AbstractThe troublesome debts of a number of developing Countries have spawned a large literature on why countries borrow, on what debt contributes to growth, on why countries repay, and on how existing debt should be dealt with. This paper provides a basic introduction to some issues in sovereign debt. First. it presents the basic accounting concepts associated with debt and some data, focusing in particular on the net resource transfers associated with external borrowing. Second, it reviews the mechanics of debt and growth implied by the Harrod-Domar and two-gap growth models, and points out how this analysis can yield misleading conclusions about the sustainability of debt and the determinants of solvency. Third, it treats debt as a component of the intertemparal maximization of a borrower in a competitive loan market facing an intertemporal budget constraint. Fourth, it introduces debt into recent models of endogenous growth, and with the conclusion that what debt contributes to growth depends sensitively upon the source of growth. Fifth, it discusses issues arising from sovereign risk, including problems of liquidity, at enforcement, and of raising revenue to finance repayment (and the attendant problem of capital flight). Sixth, the paper examines incentives to repay, showing chat maintaining access to credit markets by itself can be a reason to repay sufficient to sustain substantial debt levels. Seventh, it reviews the various options available to a creditor facing a debcor unwilling to meet currenc debt-service obligations. A conclusion is chat declaring a debcor in default and seeking a legal remedy is relatively less attractive in the context of sovereign debt, compared with domestic lending, relative to the alternative of lending "new money" to meec debt-service obligations. Eighth, the paper examines debt buybacks. One conclusion is that, in the absence of any efficiency cost imposed by outstanding debt (so that the only implications of the form and extent of repayment are for the distribution of surplus between borrower and lender) how much a buyback benefits the borrower depends on how much buying back debt reduces what is available for repayment later. Another is that, if there are efficiency losses associated with debt (a "debt overhang") then debt forgiveness can benefit both a debtor and its creditors. Contrary to claims in the literature, this outcome does not require that a reduction in the face value of debt raise its market value (a "debt Laffer Curve"), and the debtor benefits even though the buyback raises the market price of tile debt. The efficiency argument for buybacks is inconsistent with the case for lengthening the maturity of the debt.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 21.
Date of creation: Aug 1991
Date of revision:
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul R. Krugman, 1989.
"Financing vs. Forgiving a Debt Overhang,"
NBER Working Papers
2486, National Bureau of Economic Research, Inc.
- Diwan, Ishac & Demirguc-Kunt, Asli, 1990. "The menu approach to developing country external debt : an analysis of commercial banks'choice behavior," Policy Research Working Paper Series 530, The World Bank.
- Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986.
"The pure theory of country risk,"
European Economic Review,
Elsevier, vol. 30(3), pages 481-513, June.
- Kletzer, K.M. & Wright, B.D., 1990. "Sovereign Debt Renegotiation In A Consumption-Smoothing Model," Papers 610, Yale - Economic Growth Center.
- Grossman, Herschel I & Van Huyck, John B, 1988.
"Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation,"
American Economic Review,
American Economic Association, vol. 78(5), pages 1088-97, December.
- Herschel I. Grossman & John B. Van Huyck, 1989. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.