Market Valuation of External Debt

Editor(s):
Peter Wickham, Jacob Frenkel, and Michael Dooley
Published Date:
March 1989
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    Author(s)
    MICHAEL P. DOOLEY*

    Investment in debtor countries depends upon residents’ and nonresidents’ expectations about the future. The market discount on existing debt also reflects the expectation that existing creditors may share a loss. Because it is difficult in international credit arrangements to differentiate between new and old debt, it may not be possible to insulate returns on new investment from an expected loss on existing debt. This inability to “let bygones be bygones” is a potentially important market failure that may lead to misallocation of domestic savings and constrain growth in debtor countries.

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