IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/763.html
   My bibliography  Save this paper

A valuation formula for LDC debt

Author

Listed:
  • Cohen, Daniel

Abstract

A large gap may lie between the amount of debt relief that is nominally granted to a debtor and that which is actually given up by the creditors. To help put that gap in perspective, the author proposes a valuation formula that provides: (i) the price at which a buy-back of the debt, on the secondary market, is advantageous to the country; (ii) the value to creditors of having the flows of payment guaranteed against factors that hinder a country in servicing its debt; and (iii) the degree of tradeoff between growth of payments and levels of payments. The author argues that it is not good business for a country to announce its intention to buy back debt, because doing so immediately raises the price. The value of guarantees, the author argues, cannot exceed 25 percent of the market price of the debt. Typically they're worth only about 10 percent. As for the degree of tradeoff, the author's formula finds that 1 percent additional growth rate is worth a 15 percent increase in the flows of payments. An assessment of the Mexican debt-relief agreement reached in 1990 is also offered.

Suggested Citation

  • Cohen, Daniel, 1991. "A valuation formula for LDC debt," Policy Research Working Paper Series 763, The World Bank.
    • Handle: RePEc:wbk:wbrwps:763
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1991/09/01/000009265_3961001223237/Rendered/PDF/multi0page.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "Secondary Market Prices Under Alternative Debt Reduction Schemes: An Option Pricing Approach with an Application to Mexico," CEPR Discussion Papers 415, C.E.P.R. Discussion Papers.
    2. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kim Oosterlinck & Loredana Ureche-Rangau, 2004. "Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut," Working Papers CEB 04-021.RS, ULB -- Universite Libre de Bruxelles.
    2. Hayri, Aydin, 2000. "Debt relief," Journal of International Economics, Elsevier, vol. 52(1), pages 137-152, October.
    3. Ramcharran, Harri, 1999. "The determinants of secondary market prices for developing country loans: the impact of country risk," Global Finance Journal, Elsevier, vol. 10(2), pages 173-186.
    4. Dongchul Cho & Kiseok Hong, 2001. "Currency Crisis of Korea: Internal Weakness or External Interdependence?," NBER Chapters, in: Regional and Global Capital Flows: Macroeconomic Causes and Consequences, pages 337-373, National Bureau of Economic Research, Inc.
    5. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, vol. 110(460), pages 335-362, January.
    6. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "An option - pricing approach to secondary market debt : applied to Mexico," Policy Research Working Paper Series 333, The World Bank.
    7. van Wijnbergen, Sweder, 1990. "Mexico's external debt restructuring in 1989-90," Policy Research Working Paper Series 424, The World Bank.
    8. 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.
    9. Kim Oosterlinck & Loredana Ureche-Rangau, 2005. "Entre la peste et le choléra : le détenteur d’obligations peut préférer la répudiation au défaut…," Revue d'Économie Financière, Programme National Persée, vol. 79(2), pages 309-331.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.
    2. Cohen, Daniel & Verdier, Thierry, 1995. "'Secret' buy-backs of LDC debt," Journal of International Economics, Elsevier, vol. 39(3-4), pages 317-334, November.
    3. 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.
    4. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    5. Cabral, Celia C., 1996. "Evaluating debt repurchases What are the alternatives to investment?," Journal of International Economics, Elsevier, vol. 40(3-4), pages 477-494, May.
    6. Dieter Bender, 1989. "Financial innovation and international debt problems," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 24(3), pages 103-109, May.
    7. Helpman, Elhanan, 1989. "The Simple Analytics of Debt-Equity Swaps," American Economic Review, American Economic Association, vol. 79(3), pages 440-451, June.
    8. Michael Bowe & James W. Dean, 1997. "Debt-equity swaps and the enforcement of sovereign loan contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(1), pages 59-83.
    9. Jonathan P. Thomas, 2001. "Default Costs, Willingness to Pay and Sovereign Debt Buybacks," International Finance 0103002, University Library of Munich, Germany.
    10. Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 2001. "Optimal tax and debt policy with endogenously imperfect creditworthiness," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(4), pages 367-395.
    11. Cassimon, D & Renard, Robrecht, 2003. "Fiscal ownership and the role of donors: will HIPC matter?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34940, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    12. Siebert, Horst, 1990. "Wege aus der Verschuldungskrise," Kiel Working Papers 435, Kiel Institute for the World Economy (IfW Kiel).
    13. Stephan Koren, 1992. "Debt relief for Eastern Europe — Its costs and the distribution of proceeds: Some preliminary results," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 128(4), pages 639-661, December.
    14. Franke, Günter, 1990. "Avenues for the reduction of LDC-debt: An institutional analysis," Discussion Papers, Series II 100, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    15. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt Restructurings: Panacea or Pangloss?," NBER Working Papers 2637, National Bureau of Economic Research, Inc.
    16. Graham Bird & Nicholas Snowden, 1997. "From banks to bonds: a problem resolved? A perspective from the LDC debt literature," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(2), pages 207-220.
    17. Michael P. Dooley, 1994. "A Retrospective on the Debt Crisis," NBER Working Papers 4963, National Bureau of Economic Research, Inc.
    18. Diwan, Ishac & Kletzer, Ken, 1990. "Voluntary choices in concerted deals : mechanics and attributes of the menu approach," Policy Research Working Paper Series 527, The World Bank.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:763. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.