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Considerations in the Choice of the Appropriate Discount Rate for Evaluating Sovereign Debt Restructurings

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Author Info
Julie Kozack
Abstract

Assessments regarding the effectiveness of sovereign debt restructurings are often summarized by comparisons of the net present value of debt service before and after the restructuring. These calculations are inherently sensitive to the choice of discount rate. This paper explores issues that arise in selecting discount rates when evaluating sovereign debt restructurings. It suggests using a range of discount rates and centering the analysis around the internal rate of return to assess whether the debt restructuring has generated net present value savings or costs to the debtor.

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Paper provided by International Monetary Fund in its series IMF Policy Discussion Papers with number 05/09.

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Length: 29 pages
Date of creation: 03 Jan 2006
Date of revision:
Handle: RePEc:imf:imfpdp:05/09

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Keywords: Sovereign Debt Restructuring Mechanism ; Discount rates ;

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References listed on IDEAS
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  1. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November. [Downloadable!] (restricted)
    Other versions:
  2. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005," IMF Working Papers 05/137, International Monetary Fund. [Downloadable!]
  3. Catherine A. Pattillo & Hélène Poirson & Luca Antonio Ricci, 2002. "External Debt and Growth," IMF Working Papers 02/69, International Monetary Fund.
  4. Boileau Loko & Raj Nallari & Kadima D. Kalonji & Montfort Mlachila, 2003. "The Impact of External Indebtedness on Poverty in Low-Income Countries," IMF Working Papers 03/61, International Monetary Fund. [Downloadable!]
  5. Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June. [Downloadable!] (restricted)
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  6. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-136 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December. [Downloadable!] (restricted)
    Other versions:
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