Market-Based Debt-Reduction Schemes / Paul R. Krugman.

By:

Krugman, Paul R

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w2587.Publication details: Cambridge, Mass. National Bureau of Economic Research 1988.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: Recently much attention has been given to the idea of reducing the debt of developing countries through a "menu approach" of schemes that attempt to harness the discounts on debt in the secondary market. This paper, after reviewing the rationale for the orthodox strategy of concerted lending and the case for debt forgiveness, examines the logic behind several market-based debt reduction schemes. It shows that such schemes will ordinarily benefit both debtor and creditor only when the debtor is on the wrong side of the "debt relief Laffer curve" -- that is, where a reduction in nominal claims actually increases expected payment. This is, however, also the case in which unilateral debt forgiveness is in the interest of creditors in any case. The implication is that there is no magic in market-based debt reduction, as opposed to more straightforward approaches.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w2587 (Browse shelf(Opens below))	Not For Loan

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May 1988.

Recently much attention has been given to the idea of reducing the debt of developing countries through a "menu approach" of schemes that attempt to harness the discounts on debt in the secondary market. This paper, after reviewing the rationale for the orthodox strategy of concerted lending and the case for debt forgiveness, examines the logic behind several market-based debt reduction schemes. It shows that such schemes will ordinarily benefit both debtor and creditor only when the debtor is on the wrong side of the "debt relief Laffer curve" -- that is, where a reduction in nominal claims actually increases expected payment. This is, however, also the case in which unilateral debt forgiveness is in the interest of creditors in any case. The implication is that there is no magic in market-based debt reduction, as opposed to more straightforward approaches.