Efficient debt reduction

Jeffrey Sachs

No 194, Policy Research Working Paper Series from The World Bank

Abstract: It is now widely acknowledged that under certain circumstances debt reduction can improve the welfare of both creditors and debtors. Meaningful debt reduction requires an appropriate institutional setting to overcome collective action problems. In the domestic economy, bankruptcy laws provide the framework for organizing the collective interests of the creditors when a debtor is distressed. No such institutional framework exists in the international setting. This paper recommends"concerted debt restructuring,"based on below market interest rates, rather than"voluntary"debt reduction. With concerted relief, all banks would participate jointly on a fairly equal basis. The existing debt would be rescheduled, with the rates based on various indicators of ability to pay. The interest payments could be made more secure by various forms of credit enhancement. This kind of interest rate reduction could be easily managed in the context of an international debt facility. Whatever the approch, meaningful debt reduction will require the active participation of the international community.

Keywords: Strategic Debt Management; Banks&Banking Reform; Financial Intermediation; Housing Finance; Economic Theory&Research (search for similar items in EconPapers)
Date: 1989-05-31
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Citations: View citations in EconPapers (10)

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