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

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  • Julie Kozack
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    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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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=18740
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    Bibliographic Info

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

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    Length: 29
    Date of creation: 01 Dec 2005
    Date of revision:
    Handle: RePEc:imf:imfpdp:05/09

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    Related research

    Keywords: Discount rates; discount rate; debt restructuring; debt sustainability; debt service; debt stock; sovereign debt; bonds; debt restructuring operation; debt exchange; repayment capacity; cash flow; debt overhang; discounting; present value; debt-service obligations; bond; reserve holdings; market bond; emerging market bond; net present value; sovereign debt restructuring; external debt; international debt; debt burden; cash flows; treasury bonds; debt problems; internal rate of return; financial institutions; global liquidity; debt obligations; old bonds; debt relief; eurobonds; international financial markets; debt problem; bond indices; concessional debt; international finance; external indebtedness; discounted cash flow; amount of debt; net present value of debt; market debt; bond rate; market discount rate; international lending; cash flow calculations; financial markets; government debt; sovereign debtor; market discount; nominal interest rate; bond spreads;

    This paper has been announced in the following NEP Reports:

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    1. Daniel Cohen & Jeffrey Sachs, 1985. "Growth and External Debt Under Risk of Debt Repudiation," NBER Working Papers 1703, National Bureau of Economic Research, Inc.
    2. 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 107-134 National Bureau of Economic Research, Inc.
    3. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    4. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    5. Kadima D. Kalonji & Boileau Loko & Raj Nallari & Montfort Mlachila, 2003. "The Impact of External Indebtednesson Poverty in Low-Income Countries," IMF Working Papers 03/61, International Monetary Fund.
    6. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts," IMF Working Papers 05/137, International Monetary Fund.
    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.
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