Introduction

Introduction | Cases | Strategy Analysis | Aggregate Model | Conclusion | Sources Used

Project Overview

This webpage discussed the possible approaches to managing the foreign debt of a developing country, an important issue for many countries nowadays. By studying different real life cases from different regions of the world and examining the different strategies used by the main agents and their corresponding outcomes, we will eventually be able to build a model linking the negotiation process and all its particular steps to specific results. That will give us a very good idea of how recurring debt negotiations are similar or different in Europe, Latin America, and Africa. Based on the specific examples, we will be able to derive what strategies have been successful and what strategies one has to stay away from in order to successfully overcome financial crisis in a country. Finally, an aggregate game model can be created and solved, and that model would be applicable for solving the financial problems of most counties in debt.

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.”

External 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.