Developing Country Debt: Defaults and Credit Terms-- ROW Planning Grant

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This is a ROW Planning Grant to develop a more complete picture of the evolution of commercial bank lending to developing countries. More specifically, the project focuses on the effect of a country's nonpayment of debt on its subsequent credit terms in the new loans issued and its subsequent credit terms in debt reschedulings. The investigator constructs a model that focuses on borrowers' reputation to study interest rate dynamics after defaults. This is a significant contribution because existing models of borrower reputation assume that a defaulter is never able to borrow again in capital markets which is not true. In this project the investigator extends data bases employed in previous research to construct the data base necessary to investigate empirically the behavior of interest rates following defaults in the Eurocurrency credit markets. Creating a more comprehensive data base on the recent era of defaults is very valuable because past empirical work has been concentrated on earlier episodes of default by borrower nations. Preliminary work by the investigator on partial data demonstrates that the recent defaults have had a different impact on the credit of borrower nations than earlier episodes. Better data will permit a systematic investigation of the reasons why recent defaults have had different effects on the capital markets than in the past. This planning grant should be supported because it improves the theory and the data on the timely and important issue of developing country debt. The work completed under this project will lay the foundation for empirical studies by the investigator of the many unresolved questions in this area.