A Delicate Equilibrium: Debt Relief and Default Penalties in an International Context
- Peter Wickham, Jacob Frenkel, and Michael Dooley
- Published Date:
- March 1989
- GUILLERMO A. CALVO*
Debt relief and penalties are discussed in connection with sovereign-country loans. The paper focuses on conditions for the existence of penalties that are too low for ensuring Pareto efficiency and shows the possible time inconsistency of optimal debt contracts. A methodology for ascertaining debt relief implicit in international loans is outlined.