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Lending to the Poorest Countries: A New Counter-Cyclical Debt Instrument

  • Daniel Cohen
  • Hélène Djoufelkit-Cottenet
  • Pierre Jacquet
  • Cécile Valadier

One of the particular features of poor countries’ economies is their volatility, due mostly to their dependence on commodities. The paper shows that this volatility is a prime factor behind the debt crises of the poorest countries. It advocates the adoption by donors of a new lending instrument: the countercyclical loan (CCL). The key idea is to reduce the grace period of a typical concessional loan, from 10 to 5 years, and to keep the remaining grace periods as an asset that the country can draw upon, when a bad shock occurs. If no such bad shocks happen, or infrequently enough, the “floating grace” is redeemed to the country at the end of the loan as a repayment in advance without penalties. Une des caractéristiques des pays les plus pauvres est leur volatilité. Cet article montre que ce risque est l’un des facteurs essentiels qui explique les crises de dette de ces pays. A partir de ces résultats, l’article plaide en faveur de l’adoption par les bailleurs de fond d’un nouvel instrument de prêt : le prêt contra-cyclique (PCC). L’idée principale est de réduire la période de grâce d’un prêt concessionnel typique de 10 à 5 ans, et de garder les années de grâce restantes pour les utiliser en cas de mauvais choc. Si le pays ne subit aucun choc ou trop peu, cette « grâce flottante » est rendue au pays avant la fin du prêt, sous forme de remboursement anticipé sans pénalité.

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File URL: http://dx.doi.org/10.1787/242606541087
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Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 269.

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Date of creation: 03 Apr 2008
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Handle: RePEc:oec:devaaa:269-en
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  1. Christopher L. Gilbert & Alexandra Tabova, 2004. "Commodity prices and debt sustainability," Department of Economics Working Papers 0404, Department of Economics, University of Trento, Italia.
  2. Jean-Francois Brun & Gérard Chambas & Bertrand Laporte, 2001. "Stabex versus IMF compensatory financing: impact on fiscal policy," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(5), pages 571-581.
  3. Reinhart, Carmen & Borenzstein, Eduardo & Khan, Mohsin & Wickham, Peter, 1994. "The Behavior of Non-Oil Commodity Prices," MPRA Paper 8198, University Library of Munich, Germany.
  4. Reinhart, Carmen & Wickham, Peter, 1994. "Non-oil commodity prices: Cyclical weakness or secular decline?," MPRA Paper 13871, University Library of Munich, Germany.
  5. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  6. Kevin Ross & R. Brooks & Robert Powell & Ydahlia A. Metzgen Quemarez & Doris C. Ross & Mariano Cortes & Saqib Rizavi & Benoit Ketchekmen & Francesca Fornasari, 1998. "External Debt Histories of Ten Low-Income Developing Countries; Lessons from Their Experience," IMF Working Papers 98/72, International Monetary Fund.
  7. Peter Wickham & Carmen Reinhart, 1994. "Commodity Prices; Cyclical Weakness or Secular Decline?," IMF Working Papers 94/7, International Monetary Fund.
  8. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults; The Role of Volatility," IMF Working Papers 02/149, International Monetary Fund.
  9. Paul Cashin & C. John McDermott, 2001. "The Long-Run Behavior of Commodity Prices; Small Trends and Big Variability," IMF Working Papers 01/68, International Monetary Fund.
  10. Koren, Miklós & Tenreyro, Silvana, 2005. "Volatility and Development," CEPR Discussion Papers 5307, C.E.P.R. Discussion Papers.
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