Forgiveness, Buybacks, and Exit Bonds: An Analysis of Alternate Debt Relief Strategies

The 1980s have seen the issue of Third World debt rise to prominence as one of the foremost concerns for economic policy-makers. The foreign indebtedness of many developing countries has risen to such high levels that the casual observer is forced to wonder if the debt will ever be paid back. Many scholars are now arguing that the debt obligations of some of the most heavily indebted countries (HICs)are so large that they act as a severe disincentive to investment. These disincentives, in turn, reduce growth rates in the HICs, thereby making future repayments even less likely. Many explanations for the onslaught of the debt crisis have been offered. The late Seventies and early Eighties saw a rapid rise in interest rates as well as an equally rapid deterioration of the terms of trade of many HICs. Many sovereign debtors, which had been excellent investment opportunities for creditor banks, were suddenly insolvent. Low output shocks further exacerbated repayment possibilities. Faced with the possibility of non-payment, creditors entered into rescheduling negotiations with sovereign borrowers. These rescheduling have involved bargaining over the amount of repayment that will be made.