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Official credits to developing countries : implicit transfers to the banks

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  • Demirguc-Kunt, Asli
  • Huizinga, Harry

Abstract

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.

Suggested Citation

  • Demirguc-Kunt, Asli & Huizinga, Harry, 1991. "Official credits to developing countries : implicit transfers to the banks," Policy Research Working Paper Series 592, The World Bank.
    • Handle: RePEc:wbk:wbrwps:592
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. Smirlock, Michael & Kaufold, Howard, 1987. "Bank Foreign Lending, Mandatory Disclosure Rules, and the Reaction of Bank Stock Prices to the Mexican Debt Crisis," The Journal of Business, University of Chicago Press, vol. 60(3), pages 347-364, July.
    5. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
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    Cited by:

    1. Spiegel, Mark M., 1996. ""Burden sharing" in sovereign debt reduction," Journal of Development Economics, Elsevier, vol. 50(2), pages 337-351, August.
    2. J. Broz, 2011. "The United States Congress and IMF financing, 1944–2009," The Review of International Organizations, Springer, vol. 6(3), pages 341-368, September.
    3. J. Broz, 2008. "Congressional voting on funding the international financial institutions," The Review of International Organizations, Springer, vol. 3(4), pages 351-374, December.
    4. Serkan Arslanalp & Peter Blair Henry, 2002. "Debt Relief: What Do the Markets Think?," NBER Working Papers 9369, National Bureau of Economic Research, Inc.
    5. J. Lawrence Broz, 2008. "Congressional voting on funding the international financial institutions," The Review of International Organizations, Springer, vol. 3(4), pages 351-374, December.
    6. Serkan Arslanalp & Peter Blair Henry, 2005. "Is Debt Relief Efficient?," Journal of Finance, American Finance Association, vol. 60(2), pages 1017-1051, April.
    7. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.
    8. Duane Rockerbie & Stephen Easton, 2003. "Information as a Substitute for Bailouts in Sovereign Debt Markets," International Finance 0303003, University Library of Munich, Germany.

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