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Sovereign Debt Restructuring and Bank Capital

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  • Yoram Landskroner
  • Jacob Paroush

Abstract

The focus of this paper is on the interaction between a bail-out loan decision of a bank to a sovereign borrower and the adequacy of the bank's capital. The new loan is granted on two conditions: First, it must improve the likelihood of repayment of the outstanding loan; second the bank should have adequate capital.We find that in general a positive relationship exists between capital and the bail out loan and between existing debt and the new loan. However, under certain circumstances a negative relationship exists between the bank's capital and the new loan. Empirical results support the main implications of the theoretical model.

Suggested Citation

  • Yoram Landskroner & Jacob Paroush, 1999. "Sovereign Debt Restructuring and Bank Capital," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 197-207.
    • Handle: RePEc:taf:ijecbs:v:6:y:1999:i:2:p:197-207
    DOI: 10.1080/13571519984223
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    References listed on IDEAS

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    4. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472, National Bureau of Economic Research, Inc.
    5. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
    6. Landskroner, Yoram & Paroush, Jacob, 1993. "New money and adjustment policies," International Review of Financial Analysis, Elsevier, vol. 2(3), pages 177-190.
    7. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    8. Herring, Richard J, 1989. "The Economics of Workout Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 1-15, February.
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