Private Lending to Sovereign States: A Theoretical Autopsy

By the end of the 1980s the total debt of developing countries had passed the trillion-dollar mark. What should be done when the debt is heavily discounted, and countries pass the point at which they decide to default rather than service the debt in full? In this illuminating work on external debt, Daniel Cohen explodes many myths currently popular among economists, bankers, and journalists about the nature of the debt problem, its origins, and its cure. He skillfully brings complex theoretical issues to bear on the analysis of practical questions of economic policy. What is needed, he proposes, are clear rules that acknowledge the market price of the debt and deflate the fiction that a highly indebted country is solvent. Using clear, simple analytical models to illustrate his points, Cohen offers a realistic measure of national solvency in an international context. He then applies the framework to an analysis of the major debtor countries and discusses budget constraints, debt repudiation, and the economic fragility of heavily indebted nations. Daniel Cohen is Professor of Economics at the University of Nancy, a Research Fellow at the Centre d'?tudes Prospectives d'?conomie Math?matique Appliqu?es ? la Planification (CEPREMAP), Paris, and at the Center of Economic Policy Research (CEPR), London. He works regularly as a consultant for the World Bank. Contents: Intertemporal Budget Constraints. Can a Nation Escape Its Budget Constraint? Capacity versus Willingness to Pay. Voluntary and Involuntary Lending. A Solvency Index - Theory. Empirical Evaluation of the Solvency Index. Domestic and External Debt Constraints. The Fragility of Heavily Indebted Nations - Large Debt and Slow Growth.