International Debt Service and Economic Growth: Some Simple Analytics

Martin Feldstein

No 2076, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Any arrangement that is to serve as a long-term framework for international debt management must permit a politically acceptable rate of economic growth in the debtor countries while gradually improving the financial positions of the creditor banks. In addition, a realistic debt management strategy must maintain enough new lending to the debtor countries to provide an incentive for continued compliance with debt service responsibilities. This paper establishes the conditions under which these three goals are compatible. The analysis indicates that Argentina, Brazil and Mexico are now all capable of achieving significant rates of economic growth without debt write-downs or interest rate reductions. They do require additional amounts of credit but the resulting increases in the absolute size of their debts is compatible with declining ratios of debt to their own exports and to the total earnings of the creditor banks. Stated differently, limiting the ratio of debt service payments to GNP to country-specific standards, whether by long-term agreements or by annual negotiations, can achieve economic growth while improving the financial conditions of the creditor banks.

Date: 1986-11
Note: ITI IFM
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