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Avenues for the reduction of LDC-debt: An institutional analysis

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  • Franke, Günter

Abstract

This paper compares different instruments for a debt relief, given severe debt servicing problems of some sovereign debtors. Criteria for a debt relief are discussed. First, it will be argued that a debt relief cannot be supported by the argument that it benefits both, the debtor and the creditors. Second, debt reliefs have no chance to be realized if they are a "free lunch" to the debtor. Some cost has to be borne by the debtor. Third, if the debtor is actively involved in the debt relief, then the creditors will make sure by appropriate instruments that the debtor cannot raise the wealth transfer ex post to his benefit at the creditors' expense. Fourth, debt reliefs with deterministic claim reductions are inefficient. Contingent claim reductions involve smaller wealth transfers. If these reductions are made dependent on observable commodity prices, then state verification costs can be avoided and the creditors may hedge the price risk.

Suggested Citation

  • 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".
  • Handle: RePEc:zbw:kondp2:100
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    1. Barry Eichengreen and Richard Portes., 1989. "Dealing with Debt: The 1930s and the 1980s," Economics Working Papers 89-104, University of California at Berkeley.
    2. Sachs, Jeffrey, 1989. "Efficient debt reduction," Policy Research Working Paper Series 194, The World Bank.
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    4. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    5. Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.
    6. Hellwig, Martin F, 1977. "A Model of Borrowing and Lending with Bankruptcy," Econometrica, Econometric Society, vol. 45(8), pages 1879-1906, November.
    7. W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
    8. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
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    Cited by:

    1. Siebert, Horst, 1990. "Wege aus der Verschuldungskrise," Kiel Working Papers 435, Kiel Institute for the World Economy (IfW Kiel).

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