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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.


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    The World Region,

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    LDC borrowing : the option to repudiate and debt reschedulings

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LDC borrowing : the option to repudiate and debt reschedulings (English). Country Policy Department discussion paper,no. CPD 8428 Washington, D.C. : World Bank Group.