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Is the debt crisis history? Recent private capital inflows to developing countries


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  • Dooley, Michael
  • Fernandez-Arias, Eduardo
  • Kletzer, Kenneth
  • DEC


The outlook for economic development for an important group of middle-income countries has again been buoyed by substantial private capital inflows in the 1990s. As in the 1970s, this development has been met with cautious optimism. It is generally accepted that these countries need resource transfers from the rest of the world to support capital formation and growth. It is also generally accepted that these private capital flows make the allocation of resources more efficient. But there is concern that a rapid reversal of market sentiment could impose considerable adjustment costs on these same economies. The authors try to quantify what many consider to be the main reasons debtor countries have access to capital markets again: (a) Domestic policy reform in the debtor countries. (b) Debt and debt service reduction, usually associated with Brady Plan restructuring. (c) Changes in the external market, such as changes in interest rates in industrial countries. They argue that a useful barometer for access to new loans is the market value of existing sovereign debt. It follows that a quantitative analysis of the factors that caused the market value of sovereign debts to rise rapidly after 1989 would also improve understanding of the forces behind the renewed access to international capital. Empirical historical evidence suggests that fiscal reform, privatization, and debt reduction are useful in explaining relative improvements in the standing of debtor countries in international credit markets. Debtor countries with strong reform programs, in other words, are better prepared to withstand deterioration in the external environment. But the reduction in dollar interest rates since 1989 appears to be the chief factor in the debtor countries'renewed access to international loans. The authors estimate the effect of increases in dollar interest rates and conclude that the typical debtor country remains vulnerable to increases in interest rates that are well within the range of recent experience.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1327.

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Date of creation: 31 Jul 1994
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Handle: RePEc:wbk:wbrwps:1327

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Strategic Debt Management; Financial Intermediation;

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  1. Michael P. Dooley & Richard D. Haas & Steven A. Symansky, 1992. "A Noteon Burden Sharing Among Creditors," IMF Working Papers 92/21, International Monetary Fund.
  2. Cohen, Daniel, 1992. "The Debt Crisis: A Post Mortem," CEPR Discussion Papers 692, C.E.P.R. Discussion Papers.
  3. Cohen, Daniel & Portes, Richard, 1990. "The Price of LDC Debt," CEPR Discussion Papers 459, C.E.P.R. Discussion Papers.
  4. Edmar L. Bacha, 1991. "The Brady plan and beyond: New debt management options for Latin America," Textos para discussão 257, Department of Economics PUC-Rio (Brazil).
  5. 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.
  6. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
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