An analysis of debt-reduction schemes initiated by debtor countries
AbstractIn evaluating the benefits of a voluntary debt reduction scheme, look for efficiency gains that allow both debtor and creditor to gain. In particular certain debt reduction operations can: (i) increase the incentives for growth in highly indebted countries; (ii) allocate risk more efficiently between debtor and creditors; and (iii) signal the credibility of a country's willingness to adjust its economy. Market-based debt conversion is more likely to improve the debtor nations welfare when: (i) the opportunity cost of foreign exchange is low; (ii) there is great probability of default with a deadweight loss to the creditor; (iii) private rather than public debt is swapped for equity investments; (iv) the country has no other way of signalling its commitment; and (v) the country has an extreme case of debt overhang.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 153.
Date of creation: 31 Mar 1989
Date of revision:
Strategic Debt Management; Economic Theory&Research; Environmental Economics&Policies; Housing Finance; Financial Intermediation;
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