Introduction

<righ>Introduction | Cases | Strategy Analysis | Aggregate Model | Conclusion | Sources Used</right>

Project Overview

For our project, we have chosen to deal with the management of the foreign debt of developing countries, an important issue for many countries nowadays. We will use Bulgaria as a basis model and try to build some king of a model showing Bulgaria’s interactions with the World Bank, IMF, and the London Club consequent of the fulfillment of the Brady plan. By linking the negotiation process and all its particular steps to specific results, we will try to create and solve a game model applicable for most counties in debt. We will also try applying the model to other developing countries in Europe and South America in order to test it and change and improve it if necessary. As a type of experiment, we can have a simplified game online, which could be plaid out by the class in order to see how evident each undergone step following the Brady plan is.

External Debt - Definition

The external debt of a country is the portion of the government debt that is owed to foreign creditors. A large external obligation constitutes a major issue for most developing countries and emerging market economies since it is an obstacle to continued capital acquisition and future economic growth. According to the debt overhang theory, “if debt will exceed the country’s repayment ability with some probability in the future, expected debt service is likely to be an increasing function of the country’s output level. Thus some of the returns from investment by the domestic economy are effectively ‘taxed’ away by existing foreign creditors and investment by domestic and new foreign investors is discouraged.”

Extenal Debt - Possible Resolutions

An administration facing the issue of a large foreign debt to GDP ratio has three options: 1) to decree a moratorium on debt payments (to discontinue the payments on the debt); 2) to reach an agreement with the creditors to defer the payments on the debt (in this case, an installation plan is created that might cancel some of the payments on the debt or employ that part of the debt as transferred to an equal amount of equity - an action knows as a swap); 3) to negotiate a loan with international financial institutions such as the IMF (International Monetary Fund) or the World Bank that will allow the continuation of payments on the debt.