The debt `crisis' of the 1980s has drifted from one rescheduling decision to another, with no obvious `final settlement' in sight. In Discussion Paper No. 692, Programme Director Daniel Cohen argues that creditors have largely recovered their claims, while all major debtors (except Brazil) have delivered a market return to commercial banks. Focusing on the 20 countries that held 65% of total external debt in 1980, he calculates the present value of their net payments to creditors during 1982-9 and then calculates the ratio of this present value to each country's initial debt as a measure of its debt service.

Cohen then assesses whether the Brady Plan can form the basis of a `grand settlement', noting that the proposed borrowing from the World Bank and the IMF to finance the reduction of debt to private creditors will inevitably lead to conflict between debtor countries and the international financial institutions. He maintains that debtor countries should instead have been given 3- 5 years to accumulate reserves with which to repurchase their debt at a price agreed ex ante. Such repurchases played an important role in resolving the debt crisis of the 1930s, and secondary markets once again lie at the core of the Brady Plan and related proposals. A country that repurchases a small fraction of its debt always reduces its market value by strictly less than its market price, so long as its creditors know its stock of debt, although secret buy- backs may be effective, since they only raise the price of outstanding external debt when they are discovered. For the open buy-backs proposed in the Brady Plan, the right price must be chosen; this requires comprehensive ex ante agreements with creditors to prevent free-riding. Cohen distinguishes between average and marginal prices to investigate the working of the Brady Plan and shows that repurchasing half the debt of a typical middle-income debtor need not require enormous resources, so long as its price appropriately reflects the marginal value of writing down the debt.

Cohen develops a `quasi-accounting' framework, in which production depends on physical and human capital, real labour and exogenous productivity, to estimate how much of the 1980s growth slow-down can be attributed to debt. He finds that about half of the 4.9% slow-down in the large debtors was a world-wide phenomenon, 0.8% reflected a terms-of-trade effect and 0.5% reflected reduced investment; `only' 0.9% was the `unexplained' productivity slow-down caused by the debt crisis. While this may appear small, it is much greater than the real cost of writing down half the debt as estimated above. Cohen concludes by examining the lessons of the past two decades for the scope of foreign finance to enhance poor countries' growth prospects: whether sovereign and default risk impede developing countries from benefiting from world financial markets or low returns to capital accumulation impede them from growing faster.