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Debt Relief: Implications of Secondary Market Discounts and Debt Overhangs

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  • Cohen, Daniel

Abstract

An efficient rescheduling of the debt must take into account the market value of the debt. I argue here that the appropriate approach is not to write down the debt to its value on the secondary market, but to scale the flows of payments on the debt. The key to an efficient rescheduling is to offer debt relief reflecting the market discount, where the reliefs is contingent upon the country's adjustment effort ( rather than setting repayment terms "once and for all" as in the Brady plan). I propose, as an example, that stabilization or adjustment programs under the aegis of the International Monetary Fund or the World Bank could include provisions allowing debt servicing or repurchase for a set duration at the secondary market rate. This would both reflect and provide incentives to increase a country's ability to repay. Copyright 1990 by Oxford University Press.

Suggested Citation

  • Cohen, Daniel, 1990. "Debt Relief: Implications of Secondary Market Discounts and Debt Overhangs," The World Bank Economic Review, World Bank, vol. 4(1), pages 43-53, January.
    • Handle: RePEc:oup:wbecrv:v:4:y:1990:i:1:p:43-53
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    Cited by:

    1. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    2. Goopu, Sudarshan, 1996. "The analysis of emerging policy issues in development finance," Policy Research Working Paper Series 1589, The World Bank.
    3. Mr. Jochen R. Andritzky & Julian Schumacher, 2019. "Long-Term Returns in Distressed Sovereign Bond Markets: How Did Investors Fare?," IMF Working Papers 2019/138, International Monetary Fund.
    4. Gooptu, Sudarshan, 1996. "Emerging policy issues in development finance," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 85-100.
    5. Marin Ferry, 2019. "The carrot and stick approach to debt relief: overcoming moral hazard," Journal of African Economies, Centre for the Study of African Economies, vol. 28(3), pages 252-276.
    6. Jean-Claude Berthélemy, 2001. "HIPC Debt Relief and Policy Reform Incentives," WIDER Working Paper Series DP2001-105, World Institute for Development Economic Research (UNU-WIDER).
    7. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.
    8. Sawada, Yasuyuki, 2001. "Secondary market efficiency for LDC bank loans and international private lending, 1985-1993," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 549-562, August.
    9. Danny Cassimon & Marin Ferry & Marc Raffinot & Bjorn Van Campenhout, 2013. "Dynamic fiscal impact of the debt relief initiatives on african heavily indebted poor countries (HIPCs)," Working Papers DT/2013/01, DIAL (Développement, Institutions et Mondialisation).
    10. repec:dau:papers:123456789/10905 is not listed on IDEAS
    11. Danny Cassimon & Marin Ferry & Marc Raffinot & Bjorn van Campenhout, 2017. "Dynamic Fiscal Impact of The Debt Relief Initiatives on African Highly Indebted Poor Countries (HIPCs)," Working Papers hal-01489613, HAL.
    12. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, vol. 50(2), pages 313-335, August.
    13. Mr. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 2003/175, International Monetary Fund.
    14. Oladi, Reza, 2003. "International involuntary lending and contingent default threat," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 237-245.

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