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Sovereign Debt: A Primer

  • Eaton, Jonathan

The troublesome debts of a number of developing countries have spawned a large literature on why countries borrow, on the extent to which debt contributes to growth, on why countries repay, and on how debt problems should be handled. This article provides a basic introduction to some issues in sovereign debt. First, it presents the basic accounting concepts associated with debt. Second, it treats debt as a component of the intertemporal maximization of a borrower in a competitive loan market facing an intertemporal budget constraint. Third, it introduces debt into recent models of endogenous growth and examines what these models imply about the relationship between debt and growth. Fourth, it discusses issues arising from sovereign risk. Fifth, it examines incentives to repay. Sixth, it reviews the various options available to a creditor facing a debtor unwilling to meet current debt service obligations. Seveth, it examines debt buybacks. Copyright 1993 by Oxford University Press.

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Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 7 (1993)
Issue (Month): 2 (May)
Pages: 137-72

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Handle: RePEc:oup:wbecrv:v:7:y:1993:i:2:p:137-72
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  1. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  2. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  3. Kletzer, K.M. & Wright, B.D., 1990. "Sovereign Debt Renegotiation In A Consumption-Smoothing Model," Papers 610, Yale - Economic Growth Center.
  4. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  5. 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.
  6. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
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