The international debt crisis: Rescheduling of developing country debt
Abstract
The result of developing country borrowing in the international loan market is rarely outright default. Instead, debt repayment problems are met by a recontracting agreement in almost all cases. Lenders gain by recontracting in that they avoid a total writeoff of the loan as bad debt. Borrowers benefit by the avoidance of bank imposed default penalties. To investigate the role of debt rescheduling in the international loan market, a discrete time, stochastic production model with endogenous rescheduling is employed. Loan contract terms are determined by a competitive banking sector such that debt repayment is optimal when no production shock occurs. Conditional on the occurrence of a negative supply shock, a rescheduling condition is derived. It is shown that a debt repayment problem will be met by a debt rescheduling conditional on the probability of a supply shock next period and the severity of a possible supply shock. The borrowing country will prefer to reschedule problem debt only if the probability of a future supply shock is small and, should a negative shock occur, its impact on production will be small. Otherwise, default will be the preferred response. It is shown that problem debt will always be met by default unless the developing country is able to obtain new loans as part of the rescheduling agreement. A logit model is estimated to investigate the indicators of developing country debt servicing capacity. The ratio of reserves to imports is found to be the most significant indicator, while the debt-service ratio, the amortization rate, and the rate of economic growth are also important. The model indicates that the probability of repayment problems has risen since the mid-1970's but it is not successful in predicting country specific cases of rescheduling. Disequilibrium analysis is employed to study the determinants of the debt levels developing countries hold. The results indicate that developing countries were less credit constrained in late 1970's and mid-1980's than they had been in the early 1970's. A three-regime model is developed to investigate the determinants of country debt levels when debt is determined by desired levels, by a credit ceiling, or under an involuntary lending regime.
Degree
Ph.D.
Advisors
Carlson, Purdue University.
Subject Area
Economics|Finance
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