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Endogenous Creditor Seniority and External Debt Values

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  • Michael P. Dooley
  • Mark R. Stone

Abstract

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that there was a fundamental improvement in the seniority of domestic debt at the expense of foreign bank debt during the late 1980s. We argue that this was the revenue maximizing response of governments to internal and external capital flight that drained the domestic financial “tax base” subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. The econometric analysis also implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: the increase in international interest rates.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/57.

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Length: 32
Date of creation: 01 Jul 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/57

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Keywords: External debt; Debt management; Developing countries; Economic models; taxation; central bank; debtor countries; sovereign debt; debtor government; domestic creditors; debt service; fiscal gap; domestic debt; fiscal surplus; debtor governments; foreign debt; indebted countries; public debt; external financing; debt crisis; tax base; debt servicing; fiscal deficits; debt renegotiation; government budget; fiscal constraint; amount of debt; debt reduction; domestic creditor; sovereign debt renegotiation; central government budget; primary fiscal balance; central banks; debt servicing capacity; debt restructuring; domestic financing; fiscal adjustment; fiscal surpluses; tax rates; fixed government expenditure; tax returns; primary fiscal deficit; external debt reduction; primary fiscal deficits; international debt; fiscal problem; foreign borrowing; budget constraint; current account; fiscal constraints; indebted country; government budget constraint; debtor country; government expenditures; domestic investors; external loan; domestic public debt; debt stock; external debt stock; deficit financing; debt market; government debt; balance of payment; external debt servicing; debt problem; domestic borrowing; foreign loans; fiscal balance; debt-service; debt service to export; government expenditure;

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References

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  1. Kletzer, K.M. & Wright, B.D., 1990. "Sovereign Debt Renegotiation In A Consumption-Smoothing Model," Papers 610, Yale - Economic Growth Center.
  2. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  3. Anayiotos, George & de Pinies, Jaime, 1990. "The secondary market and the international debt problem," World Development, Elsevier, vol. 18(12), pages 1655-1669, December.
  4. Boehmer, Ekkehart & Megginson, William L, 1990. " Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-40, December.
  5. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
  6. Stone, Mark R., 1991. "Are sovereign debt secondary market returns sensitive to macroeconomic fundamentals? Evidence from the contemporary and interwar markets," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S100-S122, March.
  7. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  8. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
  9. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  10. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  11. Sule Ozler & Harry Huizinga, 1992. "Bank Exposure, Capital and Secondary Market Discounts on the Developing Country Debt," NBER Working Papers 3961, National Bureau of Economic Research, Inc.
  12. Ozler, Sule & Huizinga, Harry, 1991. "How factors in creditor countries affect secondary market prices for developing country debt," Policy Research Working Paper Series 622, The World Bank.
  13. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
  14. Calvo, Guillermo A, 1992. "Are High Interest Rates Effective for Stopping High Inflation? Some Skeptical Notes," World Bank Economic Review, World Bank Group, vol. 6(1), pages 55-69, January.
  15. Manmohan S. Kumar & Pablo Emilio Guidotti, 1991. "Domestic Public Debt of Externally Indebted Countries," IMF Occasional Papers 80, International Monetary Fund.
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Citations

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Cited by:
  1. Jens Hilscher & Yves Nosbusch, 2007. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Money Macro and Finance (MMF) Research Group Conference 2006 114, Money Macro and Finance Research Group, revised 24 Apr 2007.
  2. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  3. Westermann, Frank & Steinkamp, Sven, 2013. "On Creditor Seniority and Sovereign Bond Prices in Europe," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79848, Verein für Socialpolitik / German Economic Association.
  4. Goldstein, Morris, 1995. "Coping with too much of a good thing : policy responses for large capital inflows in developing countries," Policy Research Working Paper Series 1507, The World Bank.
  5. Montiel, Peter J., 1993. "Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations : a conceptual framework," Policy Research Working Paper Series 1073, The World Bank.
  6. Clark, Ephraim & Kassimatis, Konstantinos, 2004. "Country financial risk and stock market performance: the case of Latin America," Journal of Economics and Business, Elsevier, vol. 56(1), pages 21-41.
  7. 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.
  8. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.

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