Recent experience with commercial bank debt reduction
The authors review the case for market-based debt reduction and concerted debt reduction. They explain the new menu-based approach to debt reduction and discuss why it may be preferred to market-based and concerted debt reduction. In a review of the five recent debt-reduction agreements, they find that the menu approach indeed achieved debt reduction at substantially lower costs than a comparable market-based operation. By one measure, the five countries may have saved more than $8 billion. Even a menu-based approach to debt reduction, however, is unlikely to directly benefit the debtor financially. They find that the debtors suffered financial losses equal to a few percent of their GDPs. Indirect benefits, or efficiency gains associated with debt reduction, are necessary to make the operation benefit the debtor.
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- Fernandez, Raquel & Ozler, Sule, 1991. "Debt concentration and secondary market prices," Policy Research Working Paper Series 570, The World Bank.
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- Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
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