Debt Relief: Implications of Secondary Market Discounts and Debt Overhangs

Daniel Cohen

The World Bank Economic Review, 1990, vol. 4, issue 1, 43-53

Abstract: An efficient rescheduling of the debt must take into account the market value of the debt. I argue here that the appropriate approach is not to write down the debt to its value on the secondary market, but to scale the flows of payments on the debt. The key to an efficient rescheduling is to offer debt relief reflecting the market discount, where the reliefs is contingent upon the country's adjustment effort ( rather than setting repayment terms "once and for all" as in the Brady plan). I propose, as an example, that stabilization or adjustment programs under the aegis of the International Monetary Fund or the World Bank could include provisions allowing debt servicing or repurchase for a set duration at the secondary market rate. This would both reflect and provide incentives to increase a country's ability to repay. Copyright 1990 by Oxford University Press.

Date: 1990
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