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Methodological issues in evaluating debt - reducing deals

Author

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  • Claessens, Stijn
  • Diwan, Ishac

Abstract

The Brady Initiative has introduced official support for debt reduction. This new phase in the debt strategy requires a new set of tools to analyze debt deals and to study the impact of a deal on the debtor country. This paper discusses first the methodological issues involved in evaluating the different individual components of a debt deal, i.e., in a market-based context, and shows that the evaluation can be reduced to a tradeoff in two dimensions: debt reduction versus liquidity. The paper presents a specific model to evaluate a debt deal consisting of multiple components, i.e., new money and debt reduction instruments. The paper argues that creditors not participating in any debt reduction free-ride on the increase in value of the remaining debt. The paper presents the building blocks for an analysis of debt deals, discusses some common pitfalls and introduces the concept of the debt value curve. The different instruments available for debt reduction are analyzed. The paper also discusses three recent debt deals in Mexico, Philippines and Costa Rica.

Suggested Citation

  • Claessens, Stijn & Diwan, Ishac, 1990. "Methodological issues in evaluating debt - reducing deals," Policy Research Working Paper Series 408, The World Bank.
  • Handle: RePEc:wbk:wbrwps:408
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    References listed on IDEAS

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    1. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 555-606.
    2. Claessens, Stijn & Diwan, Ishac, 1989. "Conditionality and debt relief," Policy Research Working Paper Series 213, The World Bank.
    3. Cohen Daniel, 1988. "Is the discount on the secondary market a case for ldc debt relief ?," CEPREMAP Working Papers (Couverture Orange) 8823, CEPREMAP.
    4. Lamdany, R., 1988. "Voluntary Debt-Reduction Operations - Bolivia, Mexico, And Beyond," World Bank - Discussion Papers 42, World Bank.
    5. Claessens, Stijn, 1990. "The debt laffer curve: Some estimates," World Development, Elsevier, vol. 18(12), pages 1671-1677, December.
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    Cited by:

    1. Diwan, Ishac*Kletzer, Ken, 1990. "Voluntary choices in concerted deals : mechanics and attributes of the menu approach," Policy Research Working Paper Series 527, The World Bank.

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