The Price of LDC Debt
We study the behaviour of secondary market prices for the debt of seven LDCs for the period March 1986 through November 1989 (monthly data). These prices for long-term debt appear to be driven by a set of `common factors' across countries. One of these is the interest rate, Libor; we found a unit elasticity w.r.t. Libor for the average (across countries) price and for pooled data. The other `common factors' are not correlated with world macro variables, and we call these factors common only to the indebted countries the `systemic risk'. We then study the price of long-term debt relative to that of short-term debt (data for three major countries). The price of short-term debt is influenced neither by `systemic risk' nor by economic factors specific to the debtor country; we conjecture it is driven by local political risk. The results suggest that when it is serviced, long-term debt payments reflect the country's resources (export prices). The decision to service is contingent upon servicing short-term debt and on `systemic risk', which appears not to be a risk of `once-for-all' default but rather a milder form that simply alters on a period-by-period basis, but never irrevocably, the incentive of debtors to service their debt.
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