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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- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
- Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
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- Fernandez-Arias, Eduardo, 1993. "Costs and benefits of debt and debt service reduction," Policy Research Working Paper Series 1169, The World Bank.
- Lamdany, R. & Underwood, J., 1989. "Illustrative Effects Of Voluntary Debt And Debt Service Reduction Operations," World Bank - Discussion Papers 66, World Bank.
- Fernandez-Arias, Eduardo, 1991. "A dynamic bargaining model of sovereign debt," Policy Research Working Paper Series 778, The World Bank.
- Carmichael, Jeffrey, 1989. "The Debt Crisis: Where Do We Stand after Seven Years?," World Bank Research Observer, World Bank Group, vol. 4(2), pages 121-42, July.
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