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Endogenous Creditor Seniority and External Debt Values

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  • Michael P. Dooley
  • Mark R. Stone

Abstract

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that there was a fundamental improvement in the seniority of domestic debt at the expense of foreign bank debt during the late 1980s. We argue that this was the revenue maximizing response of governments to internal and external capital flight that drained the domestic financial “tax base” subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. The econometric analysis also implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: the increase in international interest rates.

Suggested Citation

  • Michael P. Dooley & Mark R. Stone, 1992. "Endogenous Creditor Seniority and External Debt Values," IMF Working Papers 92/57, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:92/57
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    References listed on IDEAS

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    1. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
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    Citations

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    Cited by:

    1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
    2. Michael P. Dooley, 1994. "A Retrospective on the Debt Crisis," NBER Working Papers 4963, National Bureau of Economic Research, Inc.
    3. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," CESifo Working Paper Series 3944, CESifo Group Munich.
    4. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
    5. Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
    6. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.
    7. Sven Steinkamp & Frank Westermann, 2017. "Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 169-178, April.
    8. Montiel, Peter J., 1993. "Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations : a conceptual framework," Policy Research Working Paper Series 1073, The World Bank.
    9. Goldstein, Morris, 1995. "Coping with too much of a good thing : policy responses for large capital inflows in developing countries," Policy Research Working Paper Series 1507, The World Bank.
    10. Sven Steinkamp & Frank Westermann, 2014. "The role of creditor seniority in Europe's sovereign debt crisis," Economic Policy, CEPR;CES;MSH, vol. 29(79), pages 495-552, July.
    11. Clark, Ephraim & Kassimatis, Konstantinos, 2004. "Country financial risk and stock market performance: the case of Latin America," Journal of Economics and Business, Elsevier, vol. 56(1), pages 21-41.

    More about this item

    Keywords

    External debt; Economic models; Debt management; Developing countries; taxation; central bank; debtor countries; sovereign debt;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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