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A Strategy for Efficient Debt Reduction

A Strategy for Efficient Debt Reduction Abstract Debt reduction, like bankruptcy, needs an institutional setting to bring it about, to overcome an inherent free-rider problem. Even when it is in the collective interests of the banks to reduce the debt, each individual bank is still tempted to insist on full repayment of its own claims, while free riding on concessions made to the debtor by the other banks. The banks have recently come to endorse the idea of “voluntary” debt reduction, in which each individual bank can choose whether to participate in a given debt reduction scheme. The Brady plan similarly has endorsed the concept of voluntary debt reduction. But because of the free rider problem, such voluntary schemes are doomed to failure. A more fruitful course would be the establishment of an International Debt Facility (IDF) to provide the necessary institutional framework for debt reduction. First, I will discuss the profound shortcomings of so-called “voluntary debt reduction” schemes, as now supported by the commercial banks. Second, I will outline the case for an IDF, and try to clear away much of the underbrush of misunderstanding that has slowed the adoption of the proposal. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Perspectives American Economic Association

A Strategy for Efficient Debt Reduction

Sachs, Jeffrey D
Journal of Economic Perspectives , Volume 4 (1) – Feb 1, 1990
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References (8)

Publisher
American Economic Association
Copyright
Copyright © 1990 by the American Economic Association
Subject
Symposia
ISSN
0895-3309
DOI
10.1257/jep.4.1.19
Publisher site
See Article on Publisher Site

Abstract

Abstract Debt reduction, like bankruptcy, needs an institutional setting to bring it about, to overcome an inherent free-rider problem. Even when it is in the collective interests of the banks to reduce the debt, each individual bank is still tempted to insist on full repayment of its own claims, while free riding on concessions made to the debtor by the other banks. The banks have recently come to endorse the idea of “voluntary” debt reduction, in which each individual bank can choose whether to participate in a given debt reduction scheme. The Brady plan similarly has endorsed the concept of voluntary debt reduction. But because of the free rider problem, such voluntary schemes are doomed to failure. A more fruitful course would be the establishment of an International Debt Facility (IDF) to provide the necessary institutional framework for debt reduction. First, I will discuss the profound shortcomings of so-called “voluntary debt reduction” schemes, as now supported by the commercial banks. Second, I will outline the case for an IDF, and try to clear away much of the underbrush of misunderstanding that has slowed the adoption of the proposal.

Journal

Journal of Economic Perspectives – American Economic Association

Published: Feb 1, 1990

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