Sovereign debt : a primer
AbstractThe troublesome debts of many developing countries have spawned much literature on why countries borrow, on what debt contributes to growth, on why countries repay, and on how to deal with existing debt. The author provides an analytical primer on the following aspects of sovereign debt : 1) the basic accounting concepts associated with debt and some data associated with external borrowing; 2) debt as a component of an optimizing model of borrowing in a competitive loan market, when the borrower faces an intertemporal budget constraint; 3) debt as a component of recent models of endogenous growth; 4) problems arising from sovereign risk, including problems of liquidity, enforcement, and revenue-raising to finance repayment; 5) incentives to repay; 6) options available to a creditor whose debtor is unwilling to meet current debt-service obligations; and 7) debt buybacks. The author concludes that in the absence of any efficiency cost imposed by outstanding debt, how much a buyback benefits the borrower depends on how much buying back debt reduces what is available for repayment later. The author also concludes that if there are efficiency losses associated with debt, debt forgiveness can benefit both a debtor nation and its creditors. Contrary to claims in the literature, this outcome does not require that a reduction in the face value of debt raise its market value, and the debtor benefits even though the buyback raises the market price of the debt.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 855.
Date of creation: 29 Feb 1992
Date of revision:
Banks&Banking Reform; Environmental Economics&Policies; Strategic Debt Management; Economic Growth; Economic Theory&Research;
Other versions of this item:
- Jonathan Eaton, 1991. "Sovereign Debt: A Primer," Boston University - Institute for Economic Development 21, Boston University, Institute for Economic Development.
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- Herschel I. Grossman & John B. Van Huyck, 1985.
"Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation,"
NBER Working Papers
1673, National Bureau of Economic Research, Inc.
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- Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986.
"The Pure Theory of Country Risk,"
NBER Working Papers
1894, National Bureau of Economic Research, Inc.
- Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
- Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
- Krugman, Paul, 1988.
"Financing vs. forgiving a debt overhang,"
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Elsevier, vol. 29(3), pages 253-268, November.
- Diwan, Ishac & Demirguc-Kunt, Asli, 1990. "The menu approach to developing country external debt : an analysis of commercial banks'choice behavior," Policy Research Working Paper Series 530, The World Bank.
- Kletzer, K.M. & Wright, B.D., 1990. "Sovereign Debt Renegotiation In A Consumption-Smoothing Model," Papers 610, Yale - Economic Growth Center.
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