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Official credits to developing countries : implicit transfers to the banks

Listed author(s):
  • Demirguc-Kunt, Asli
  • Huizinga, Harry

This paper investigates the impact on the wealth of bank share holders on the transfer of official resources to the debtor countries. The main aim was to derive actual estimates of increases in shareholder wealth following important news concerning future transfers from the multilaterals to the debtor nations. The main result, is that stock market expects virtually all additional resources provided to debtor countries to be used for debt service to commercial banks. While the estimated magnitude of these effects are informative, the emphasis should be on the direction of these effects as they are robust to overestimation problems. Clearly, official resources provided to debtor countries do devolve to creditor banks. However, the debtor countries should at least gain in so far as the reduction of a debt overhang eliminates investment distortions. The results stem from the fact that some of the monies provided by the multilaterals are specifically earmarked for debt service or are in the form of general balance-of-payments support that the developing countries can use for private debt service. Official creditor resources that are specially provided to finance development projects are less likely to be allocated to bank debt service.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 592.

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Date of creation: 28 Feb 1991
Handle: RePEc:wbk:wbrwps:592
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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. Billingsley, Randall S. & Lamy, Robert E., 1988. "The regulation of international lending IMF support, the debt crisis, and bank stockholder wealth," Journal of Banking & Finance, Elsevier, vol. 12(2), pages 255-274, June.
  3. Eyssell, Thomas H. & Fraser, Donald R. & Rangan, Nanda K., 1989. "Debt-equity swaps, regulation K, and bank stock returns," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 853-868, December.
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