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Debt Relief

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  • Hayri, Aydin

Abstract

This paper develops a model for pricing sovereign debt under continuous time uncertainty, allowing creditors to carry out debt reductions. Focusing on the sovereign’s willingness to pay rather than on their ability to pay, it models debt reductions as a non-cooperative game. The formulae derived from the model successfully predict the outcomes of the Brady debt relief deals. The model also predicts that the sovereign will get a positive share of the surplus generated by the debt reductions and that the country will be on the ‘wrong’ side of its Debt Laffer curve well before the debt reduction.

Suggested Citation

  • Hayri, Aydin, 1997. "Debt Relief," CEPR Discussion Papers 1701, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1701
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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
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    10. Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.
    11. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
    12. Claessens, Stijn & Diwan, Ishac, 1994. "Recent experience with commercial bank debt reduction: Has the "menu" outdone the market?," World Development, Elsevier, vol. 22(2), pages 201-213, February.
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    15. Diwan, Ishac & Spiegel, Mark M., 1994. "Are buybacks back? Menu-driven debt reduction schemes with heterogeneous creditors," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 279-293, October.
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    Cited by:

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    2. Ajit Singh & Ann Zammit, 2019. "Globalisation, labour standards and economic development," Chapters, in: Jonathan Michie (ed.), The Handbook of Globalisation, Third Edition, chapter 12, pages 202-224, Edward Elgar Publishing.
    3. Michael WESTPHALEN, 2002. "Valuation of Sovereign Debt with Strategic Defaulting and Rescheduling," FAME Research Paper Series rp43, International Center for Financial Asset Management and Engineering.
    4. Jeanneret, Alexandre, 2018. "Sovereign credit spreads under good/bad governance," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 230-246.
    5. Mella-Baral, Pierre & Tychon, Pierre, 1996. "Default risk in asset pricing," LIDAM Discussion Papers IRES 1996021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. Pascal François & Georges Hübner & Jean-Roch Sibille, 2011. "A Structural Balance Sheet Model of Sovereign Credit Risk," Finance, Presses universitaires de Grenoble, vol. 32(2), pages 137-165.
    7. Andrade, Sandro C., 2009. "A model of asset pricing under country risk," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 671-695, June.

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    More about this item

    Keywords

    Brady deals; Continuous-time uncertainty real options; Debt Reduction; Debt Relief;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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