Which is the Best Debt Relief Policy For Emerging Markets ?

Patrick Artus

Revue économique, 2001, vol. 52, issue 2, 303-317

Abstract: We build a model where one borrowing emerging country receives both public and private loans. If its economic situation worsens, the cancellation of a part of the public loans will enable it to avoid defaulting on its private loans, but the fact that the intervention of public lenders is expected leads to an excess of private lending compared to the socially optimal level. If there is no discrimination between private and public lenders, which means that the same proportion of private and public loans is cancelled, the moral hazard effect disappears, but the risk of default by lending banks appears. This paper examines a debt relief programme which may be implemented in the event of difficulty in the borrowing country and which does not lead to the two above-mentioned shortcomings.

Date: 2001
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