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Interest rates, official lending, and the debt crisis: A reassessment

  • Demirguc-Kunt, Asli
  • Detragiache, Enrica

The authors document and try to explain the sizable cross-country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973-89. They find that Indonesia and Turkey, which are often praised for not rescheduling in the 1980s, paid interest rates substantially below LIBOR - and avoided the interest rate shock of the early 1980s. Differences in the default-risk premium explain some of the variation among countries, but different degrees of access to official loans carrying highly subsidized interest rates played the major role. In the sample they studied, they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates. For the period 1981-89, it is possible to control for differences in the currency composition of debt, and the results are essentially unchanged. These results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross-country differences in the burden of interest payments.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 44 (1994)
Issue (Month): 2 (August)
Pages: 263-285

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Handle: RePEc:eee:deveco:v:44:y:1994:i:2:p:263-285
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  1. Huizinga, Harry, 1991. "Withholding taxes and international bank credit terms," Policy Research Working Paper Series 765, The World Bank.
  2. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  3. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  4. Rudiger Dornbusch, 1987. "Debt Problems and the World Macro Economy," NBER Working Papers 2379, National Bureau of Economic Research, Inc.
  5. Detragiache, Enrica, 1992. "Optimal loan contracts and floating-rate debt in international lending to LDCs," European Economic Review, Elsevier, vol. 36(6), pages 1241-1261, August.
  6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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