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Is Debt Relief Efficient?

  • Henry, Peter B.

    (Stanford U)

  • Arslanalp, Serkan

When Less Developed Countries (LDCs) announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60 percent in real dollar terms--a $42 billion increase in shareholder value. In contrast, there is no significant stock market increase for a control group of LDCs that do not sign Brady agreements. The results persist after controlling for IMF programs, trade liberalizations, capital account liberalizations, and privatization programs. The stock market appreciations successfully forecast higher future net resource transfers, investment and growth. Creditors also benefit from the Brady Plan. Controlling for other factors, stock prices of US commercial banks with significant LDC loan exposure rise by 35 percent--a $13 billion increase in shareholder value. The results suggest that debt relief can generate large efficiency gains when the borrower suffers from debt overhang.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1837.

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Date of creation: Nov 2003
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Handle: RePEc:ecl:stabus:1837
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  1. Serkan Arslanalp & Peter Blair Henry, 2006. "Debt Relief," NBER Working Papers 12187, National Bureau of Economic Research, Inc.
  2. John H. Makin & Rudiger Dornbusch & David Zlowe, 1989. "Alternative Solutions to Developing-Country Debt Problems," Books, American Enterprise Institute, number 52103, November.
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  4. Boehmer, Ekkehart & Megginson, William L, 1990. " Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-40, December.
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  7. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  8. Peter Blair Henry, 2003. "Capital Account Liberalization, The Cost of Capital, and Economic Growth," NBER Working Papers 9488, National Bureau of Economic Research, Inc.
  9. Henry, Peter B., 2001. "Is Disinflation Good for the Stock Market?," Research Papers 1681, Stanford University, Graduate School of Business.
  10. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
  11. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1988. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
  12. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  14. Dong Lee & Bong-Chan Kho & Rene M. Stulz, 2000. "U.S. Banks, Crises, and Bailouts: From Mexico to LTCM," American Economic Review, American Economic Association, vol. 90(2), pages 28-31, May.
  15. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
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  17. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 46, December.
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  19. Bruno, Michael & Easterly, William, 1996. "Inflation's Children: Tales of Crises That Beget Reforms," American Economic Review, American Economic Association, vol. 86(2), pages 213-17, May.
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  24. Collins, Susan M, 1990. "Lessons from Korean Economic Growth," American Economic Review, American Economic Association, vol. 80(2), pages 104-07, May.
  25. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
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