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Is the discount on the secondary market a case for ldc debt relief ?


  • Cohen Daniel


In 1988, the prices on the secondary market of LDC debt averaged 50 cents per dollar of face value. From the observation of such discount, this paper goes one step further and argues thatthe debt should be written down in order to account for the discrepancy between the face and market value of the debt. The paper is structured as follows. Section 1 spells out the model, section 2 calculates the socially efficient and the post-default growth rates of the economy. Section 3 shows that the lenders, if they were to monitor the investment and the consumption strategy of the borrower, would choose a lower investment strategy than the socially efficient one. Section 4 shows how an optimum rescheduling can achieve the equilibrium described in section 3. Section 5 shows the dynamic inconsistency of the optimal strategy spelled out in section 4, and shows the link with the"debt overhang"literature. Section 6 investigates the empirical relevance of the"debt overhang".
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Suggested Citation

  • Cohen Daniel, 1988. "Is the discount on the secondary market a case for ldc debt relief ?," CEPREMAP Working Papers (Couverture Orange) 8823, CEPREMAP.
  • Handle: RePEc:cpm:cepmap:8823

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    References listed on IDEAS

    1. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 555-606.
    2. Rudiger Dornbusch & Thomas S. Johnson & Anne O. Krueger, 1988. "Our LDC Debts," NBER Chapters,in: The United States in the World Economy, pages 161-214 National Bureau of Economic Research, Inc.
    3. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    4. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472 National Bureau of Economic Research, Inc.
    5. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
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    Cited by:

    1. Claessens, Stijn & Diwan, Ishac, 1990. "Methodological issues in evaluating debt - reducing deals," Policy Research Working Paper Series 408, The World Bank.
    2. Ozler, Sule*Huizinga, Harry, 1991. "How factors in creditor countries affect secondary market prices for developing country debt," Policy Research Working Paper Series 622, The World Bank.
    3. Corsepius, Uwe, 1989. "Peru at the brink of economic collapse: Current problems and policy options," Kiel Discussion Papers 153, Kiel Institute for the World Economy (IfW).
    4. Palac-McMiken, Evanor D., 1995. "Predicting Discounts of Secondary Market Sovereign Debts," Philippine Journal of Development JPD 1995 Vol. XXII No. 1-, Philippine Institute for Development Studies.
    5. Aasim Mairaj Husain, 1988. "Forgiveness, Buybacks, and Exit Bonds: An Analysis of Alternate Debt Relief Strategiest," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(4), pages 819-828.

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