DP460 A Valuation Formula for LDC Debt

Author(s): Daniel Cohen
Publication Date: September 1990
Keyword(s): Balance of Payments, LDC Debt
JEL(s): 310, 430
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=460

This paper gives a valuation formula for LDC debt that is used to assess: i) the price at which a buy-back of the debt is advantageous to the country (we shall see that it is likely to be half the observed market price); ii) the value to the creditors of having the flows of payment guaranteed against the extrinsic stochastic disturbance faced by the country (we shall see that it may not exceed 25%); iii) the trade-off between growth of payments and levels of payments (we show that a 1% additional growth rate is worth a 15% increase of the flows). We offer finally an assessment of the Mexican agreement reached in early 1990.