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LDC borrowing : the option to repudiate and debt reschedulings (English)

This paper extends the discussion of LDC borrowing with a discussion of possible repudiation of the external debt of countries and the impact on the value of debt when reschedulings can occur. It uses options valuation methods to define the claims held by various lenders on the earnings of LDCs. The primary purpose of the paper is to develop a systematic structure, using modern finance theory, with which to analyze sovereign borrowing. The critical role played by options embedded in country debt is clarified and then used to study the incentives and expected behavior of lenders and borrowers under various circumstances. Factors which determine option values are then shown to determine also the value of the debt to each party. The party also demonstrates that since lenders and borrowers have the ability to influence these factors, predictable conflicts and concordance can occur among them under well defined circumstances. Reschedulings are given an options trading interpretation and a clearer understanding is thus provided for what actually occurs when LDC debt is restructured. The knowledge that reschedulings can occur in the future is shown to allow lenders and borrowers to take actions, which increases the value of loans to both parties.

Details

  • Author

    Sadeq,Sayeed

  • Document Date

    1984/04/30

  • Document Type

    Departmental Working Paper

  • Report Number

    CPD8428

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2017/08/10

  • Disclosure Status

    Disclosed

  • Doc Name

    LDC borrowing : the option to repudiate and debt reschedulings

  • Keywords

    amount of debt outstanding;volatility of interest rate;real rate of interest;commercial bank debt;asset value;commercial bank loan;journal of finance;public bond issue;capital goods import;external debt obligation;sale of equity;underlying asset value;senior claim holder;reduction in consumption;cost of transfer;class of debt;higher interest rate;payment of debt;cost of failure;structure of incentive;debt service ratio;net foreign exchange;rates of return;sale of asset;interest of creditor;options on future;interest rate volatility;loans to country;class of creditor;governments of country;short term debt;commercial bank credit;moral hazard problem;cost of default;net present value;long term debt;interest rate change;probability of repudiation;conflicts of interest;domestic finance;risk of default;net asset value;investment policy guidelines;international capital market;contingent claim;call option;option value;country debt;exercise price;option valuation;buy back;restrictive covenant;risky debt;policy restrictions;discount bond;equity value;debt issue;subordinated debt;corporate finance;Cash flow;external borrowing;contractual provision;expected value;corporate world;public offering;front-end fee;junior debt;retained earnings;current consumption;maturity date;public good;equity holder;monitoring cost;investment option;options trading;hedge portfolio;index bond;equity interest;liability portfolio;corporate security;residual value;special form;consumption function;sinking fund;implicit interest;principal payment;high probability;net return;debt claim;adverse incentive;longer period;Economic Policy;export credit;dividend payout;bond contract;relative value;high debt;payment need;corporate borrowing;back up;senior debt;private loan;borrower country;external obligation;structural adjustment;senior creditor;option pricing;exogenous default;financial economics;debt holder;public debt;credible commitment;public issue;public policy;free rider;credit market;market uncertainty;borrowing requirement;private placement;debt security;debt securities;private debt;policy option;public market;liability side;expected loss;trade credit;external liability;enforceable contract;debtor country;consumption policy;restrictive condition;primary purpose;modern finance;real asset;sovereign borrowing;Corporate Law;saving rate;differential impact;risky investment;increasing function;equity claim;senior bondholder;investment opportunities;contractual stipulation;foreign capital;option price;respective claim;trade deficit;regular interest;domestic good;corporate case;international market;exogenous factor;bond covenant;dividend payment;residual claim;payment date;debt restructuring;syndicated loan;debt contract;bond price;behavioral implications;valuable asset;private holders;bank creditor;individual investor;future earnings;contractual payment;

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Citation

Sadeq,Sayeed

LDC borrowing : the option to repudiate and debt reschedulings (English). Country Policy Department discussion paper,no. CPD 8428 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/516451492001542016/LDC-borrowing-the-option-to-repudiate-and-debt-reschedulings