Market-Based Debt Reduction for Developing Countries · Principles and Prospects

This manual reviews and consolidates what economists understand about market based schemes and concerted debt restructurings. Its purpose is to reach those who wish to come to an independent judgement on the value of different market-based transactions and different forms of debt restructurings. This manual is structured as follows. Sections 1 and 2 discuss the evolution of debt crisis managment from a coordinated approach to today's greater emphasis on voluntarism. Section 3 then begins to analyze the basic building blocks of market-based transactions. In sections 4 through 8 these fundamentals are applied to the study of several distinct types of market-based schemes, each of which is a close cousin to schemes that have actually been implemented. The text presents simple examples designed to highlight the mechanics. Section 9 turns to an important empirical question: is debt reduction in the collective interest of creditors? Presented are estimates and a discussion of some of the shortcomings of extreme conclusions. Section 10 presents the case for concerted debt reduction schemes over voluntary schemes. Also discussed are the workings of the "menu approach". Section 11 looks at the most important example of a concerted menu plan to date: Mexico 1989. Finally, section 12 offers conclusions and outlook.