Is the discount on the secondary market a case for LDC debt relief?
AbstractIn 1988, the prices on the secondary market of LDC debt averaged 50 cents per dollar of face value. From the observation of such discount, this paper goes one step further and argues thatthe debt should be written down in order to account for the discrepancy between the face and market value of the debt. The paper is structured as follows. Section 1 spells out the model, section 2 calculates the socially efficient and the post-default growth rates of the economy. Section 3 shows that the lenders, if they were to monitor the investment and the consumption strategy of the borrower, would choose a lower investment strategy than the socially efficient one. Section 4 shows how an optimum rescheduling can achieve the equilibrium described in section 3. Section 5 shows the dynamic inconsistency of the optimal strategy spelled out in section 4, and shows the link with the"debt overhang"literature. Section 6 investigates the empirical relevance of the"debt overhang".
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 132.
Date of creation: 30 Nov 1988
Date of revision:
Economic Theory&Research; Banks&Banking Reform; Environmental Economics&Policies; Strategic Debt Management; Financial Intermediation;
Other versions of this item:
- Cohen Daniel, 1988. "Is the discount on the secondary market a case for ldc debt relief ?," CEPREMAP Working Papers (Couverture Orange) 8823, CEPREMAP.
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