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Bank Loans Versus Bond Finance: Implications for Sovereign Debtors

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  • Misa Tanaka

Abstract

This article analyses the optimal choice between bank loans and bond finance for a sovereign debtor. It shows that if borrowers can be 'publicly monitored' by a rating agency that disseminates the information about their creditworthiness, their choice between bank loans and bond finance is determined by the trade-off between two deadweight costs: the crisis cost of default and the cost of debtor moral hazard. If crisis costs are large, sovereigns use bank loans for short-term financing and bond issuance for long-term financing. I also demonstrate that state contingent debt and IMF intervention can improve welfare. Copyright 2006 Bank of England.

Suggested Citation

  • Misa Tanaka, 2006. "Bank Loans Versus Bond Finance: Implications for Sovereign Debtors," Economic Journal, Royal Economic Society, vol. 116(510), pages 149-171, March.
    • Handle: RePEc:ecj:econjl:v:116:y:2006:i:510:p:c149-c171
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    Cited by:

    1. Ghosal, Sayantan & Thampanishvong, Kannika, 2013. "Does strengthening Collective Action Clauses (CACs) help?," Journal of International Economics, Elsevier, vol. 89(1), pages 68-78.
    2. Ka Lok Wong (Steve) & Mark Manger & Ugo Panizza, 2026. "Determinants of Sovereign Bond Issuance in Emerging Markets," IHEID Working Papers 06-2026, Economics Section, The Graduate Institute of International Studies.
    3. Gregor Irwin & Gregory Thwaites, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
    4. Goodell, John W. & Goyal, Abhinav, 2018. "What determines debt structure in emerging markets: Transaction costs or public monitoring?," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 184-195.
    5. Sebastian Horn & Carmen M. Reinhart & Christoph Trebesch, 2025. "China's Lending to Developing Countries: From Boom to Bust," Journal of Economic Perspectives, American Economic Association, vol. 39(4), pages 75-100, Fall.
    6. Mijiyawa, Abdoul’ Ganiou, 2024. "Does private share of public external debt support economic growth in developing countries?," International Economics, Elsevier, vol. 178(C).
    7. Biana De Paoli & Glenn Hoggarth & Victoria Saporta, 2006. "Financial Stability Paper No 1: Costs of Sovereign Default," Bank of England Financial Stability Papers 1, Bank of England.
    8. Nada Azmy Elberry & Frank Naert & Stijn Goeminne, 2023. "Optimal public debt composition during debt crises: A review of theoretical literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 351-376, April.

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