Sovereign Debt: A Survey of Some Theoretical and Policy Issues

July 1, 1993

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Vivek B. Arora Sovereign Debt: A Survey of Some Theoretical and Policy Issues, (USA: International Monetary Fund, 1993) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper surveys the literature on sovereign debt that deals with the issues of a country’s ability-to-pay, its willingness-to-pay, and the policy responses to the debt crisis of the 1980s. The existence of an ability-to-pay problem suggests a need for debt reduction, but plans for debt relief face potential incentive problems, and sovereign debt repurchases are not always a welfare maximizing method of debt restructuring. The paper synthesizes the main conclusions on these issues. With a willingness-to-pay problem, the potential penalties for debt repudiation are important in the endogenous determination of the repayment outcome. Penalties that are intertemporal in nature have different implications for debt repudiation than do intratemporal penalties. In addition, the asymmetric distribution of the costs of default can lead to a recurrent cycle of debt accumulation and default.

Subject: Asset and liability management, Debt reduction, Debt relief, Debt service, External debt, Financial crises, Public debt

Keywords: Caribbean, Debt buy-backs, Debt crisis, Debt obligation, Debt reduction, Debt relief, Debt repayment, Debt repudiation, Debt restructuring, Debt service, Global, Repayment decision, Sub-Saharan Africa, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/056
Stock No:

WPIEA0561993
ISBN:

9781451968170
ISSN:

1018-5941

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