To Give or to Forgive? Aid versus Debt Relief

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries' characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.

Bibliographic Details

Main Authors:	Cordella, Tito, Missale, Alessandro
Language:	English
Published:	2011-10-01
Subjects:	ABSORPTIVE CAPACITY, ACCOUNTING, ALLOCATION OF CREDIT, AMOUNT OF CREDIT, AMOUNT OF DEBT, AMOUNT OF LOANS, ARREARS, ASYMMETRIC INFORMATION, AVERAGE DEBT, BANK CREDIT, BANK FOR INTERNATIONAL SETTLEMENTS, BANK POLICY, BOND MARKETS, BOND YIELD, BONDS, BORROWING CAPACITY, BORROWING COSTS, CAPITAL MARKET, CAPITAL MARKETS, CASE OF DEFAULT, CLAIM, COMMERCIAL BANKS, COMMERCIAL DEBT, COST OF DEBT, CREDIT CONSTRAINT, CREDIT HISTORY, CREDITOR, CREDITORS, CREDITWORTHINESS, CREDITWORTHY BORROWER, CURRENCY, CURRENT COSTS, DEBT, DEBT CRISIS, DEBT FORGIVENESS, DEBT LEVELS, DEBT OBLIGATIONS, DEBT OVERHANG, DEBT RATIOS, DEBT REDUCTION, DEBT RELIEF, DEBT RELIEF INITIATIVE, DEBT RELIEF INITIATIVES, DEBT SERVICE, DEBT SERVICE PAYMENTS, DEBT SUSTAINABILITY, DEBT-RELIEF, DEBTOR, DEBTOR COUNTRIES, DEBTOR GOVERNMENT, DEBTORS, DEBTS, DEFAULT COSTS, DEFAULT RISK, DEFAULTERS, DEFAULTS, DEMAND FOR CREDIT, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT ASSISTANCE, DISBURSEMENTS, DISCOUNT RATES, DOLLAR BONDS, DOMESTIC DEBT, ECONOMIC ACTIVITY, EQUALITY, EUROBOND, EXPENDITURE, EXTERNAL DEBT, EXTERNAL RESOURCES, FINANCIAL MARKETS, FOREIGN AID, FOREIGN CAPITAL, FOREIGN CLAIMS, FOREIGN CURRENCIES, FOREIGN INVESTMENT, FOREIGN INVESTORS, FUNGIBLE, FUTURE DEBT, GLOBAL BOND, GLOBAL DEVELOPMENT FINANCE, HIGH DEBTS, HIGH INTEREST RATES, HIGHLY INDEBTED COUNTRIES, IMPACT OF DEBT, INDEBTED, INDEBTED COUNTRIES, INDEBTED COUNTRY, INDEBTED POOR COUNTRIES, INDEBTEDNESS, INSTITUTIONAL REFORM, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL FINANCE, INTERNATIONAL LENDING, INTERNATIONAL SETTLEMENT, INTERNATIONAL SETTLEMENTS, INVESTING, INVESTMENT CHOICES, INVESTMENT DECISION, INVESTMENT DECISIONS, INVESTMENT OPPORTUNITIES, INVESTMENT PROJECTS, LACK OF CAPITAL, LENDERS, LOAN, LOAN VOLUMES, LONDON CLUB, LONG-TERM BORROWING, LONG-TERM LOANS, MARKET ACCESS, MARKET VALUE, MATURITY, MONETARY FUND, MORAL HAZARD, MULTILATERAL DEBT, MULTILATERAL DEBT RELIEF, MULTINATIONAL, NEW CREDIT, OLD CREDITORS, OLD DEBT, OUTPUT LOSS, OUTSTANDING DEBT, PAST DEBT, POLITICAL ECONOMY, POOL OF BORROWERS, PRESENT VALUE, PRESENT VALUE OF DEBT, PRIVATE BORROWING, PRIVATE CAPITAL, PRIVATE CAPITAL INFLOWS, PRIVATE CREDIT, PRIVATE CREDITORS, PRIVATE DEBT, PRIVATE FUNDS, PRIVATE LENDERS, PRIVATE LENDING, PRIVATE LOANS, PRODUCTIVE INVESTMENT, PUBLIC CREDIT, PUBLIC FINANCE, PUBLIC INVESTMENT, RECIPIENT COUNTRIES, RECIPIENT COUNTRY, RECOVERY RATE, REMAINING DEBT, RENEGOTIATION, REPAYMENT, RETURN, RETURN ON INVESTMENT, RETURNS, RISK NEUTRAL, RISK-FREE RATE, SAVINGS, SERIAL DEFAULTERS, STOCK OF DEBT, SUBSIDIARIES, THIRD WORLD DEBT, TREASURIES, TREASURY, TREASURY BILLS, VALUE OF DEBT, YIELD SPREAD, YIELD SPREADS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111026084243 https://hdl.handle.net/10986/3625
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