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An analysis of debt-reduction schemes initiated by debtor countries


  • Diwan, Ishac
  • Claessens, Stijn


In evaluating the benefits of a voluntary debt reduction scheme, look for efficiency gains that allow both debtor and creditor to gain. In particular certain debt reduction operations can: (i) increase the incentives for growth in highly indebted countries; (ii) allocate risk more efficiently between debtor and creditors; and (iii) signal the credibility of a country's willingness to adjust its economy. Market-based debt conversion is more likely to improve the debtor nations welfare when: (i) the opportunity cost of foreign exchange is low; (ii) there is great probability of default with a deadweight loss to the creditor; (iii) private rather than public debt is swapped for equity investments; (iv) the country has no other way of signalling its commitment; and (v) the country has an extreme case of debt overhang.

Suggested Citation

  • Diwan, Ishac & Claessens, Stijn, 1989. "An analysis of debt-reduction schemes initiated by debtor countries," Policy Research Working Paper Series 153, The World Bank.
  • Handle: RePEc:wbk:wbrwps:153

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    References listed on IDEAS

    1. Raquel Fernandez & David Kaaret, 1988. "Bank Size, Reputation, and Debt Renegotiation," NBER Working Papers 2704, National Bureau of Economic Research, Inc.
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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. Detragiache, Enrica, 1991. "Sensible debt buybacks for highly indebted countries," Policy Research Working Paper Series 621, The World Bank.


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