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PolicyResearch
JN)4r
WORKING PAPERS
Debtand International
Finance
InternationalEconomicsDepartment
The World Bank
August 1992
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
WPS 943
Burden-sharing
amongOfficial
and Private Creditors
AsihDemirgui-Kunt
and
Eduardo Fernandez-Arias
Official creditors -
especially multilaterals -
4
3 9t43
have absorbed
moreof the burdenof thedebt crisis than privatecreditorshave.
Officialcreditors are not necessarilyweaker or less senior, but
for the sake of nonfinancialobjectives,they may be unwilling
(rather than unable) to exercise their substantialenforcement
power.
ThePolicyResearutWokingPapa: dissminstethefindingsof workinprogressandencouragetheexchangcof
ideasamongBankstaff
and allothersintmrestdin dcelopment issues.Iles papers,distnbutedbytheResearchAdvisoryStaff,carrythe namesof theauthors,
reflectye attrvieva andshod beusodandeited ordgly. lct dings.intzpmn
atioms,andconclusioo
s
aem
theauthors'own.y
shouldnotbe attnwbuted
to fthWodd Bank,its BoardiofDireaors, its managernenl,or any of its mrnber comuitns.
t
Research
~~~~~~~~~~~~~~~~~Policy
Debtand InternationalFinance
WPS 943
This paper - a productof the Debt and InternationalFinanceDivision,InternationalEconomicsDepartment- is
part of a larger effort in thedepartmentto understandthe economicrelationshipsbetweendevelopingcountriesand
externalcreditorsregardingcredit rationingand debt negotiations.Copies of the paper are availablefree from the
WorldBank, 1818H StreetNW,WashingtonDC20433.PleasecontactKarinWaelti,roomN9-043,extension37664
(August 1992,31 pages).
Demirgtli-Kuntand Femandez-Ariasanalyze howthe
burden of the debt crisis has beensf.aredby various
classesof creditors.Given the risingshareof official
debt in the total debt of developingcountries,official
creditors havea growingneed to developa burdensharingindicator.
This paperrepresentsthe very firststep in this
direction.So, its analysisnarrowlyfocusesonly on
financialprofits. No inferenceshouldbe made
regardingthe overall performanceof officialcreditors, whoseevaluationrequiresthe assessmentof
their nonfinancialobjectives.Similarly,no inference
should be drawn regardingthe solvencyof
multilaterals,whichis essentiallydeterminedby
externalguarantees.Extensivefurtherresearch is
requiredto shed lighton these areas and to eventually
derive the relevantpolicy conclusions.
The authorsbriefly reviewthe relativeperformanceof externalcreditorsduringthe debt crisis in
termsof exposure,net transfers,and arrears.They
argue,however,that a meaningfulmeasureof burdensharingneeds to go beyond thoseobservationsand
consider the capital lossesthat creditorshave madeon
outstandingdebt stocks.So, they developa financially sound measureof rate of return - incorporating repaymentflows and capitallosses - and derive
a financiallysound definitionof burden-sharing.This
definitionis thenapplied to a group of severely
indebtedcountriesfor whichsecondarymarketprices
are available.The finding:privatecreditorsmadea
loss of about 30 percent duringthe debt crisis, and
officialcreditorsavoidedabsorbinga comparable
burden only if, on average,the impliedpricesof their
debt stocks were significantlyhigherthan market
prices.
To assessburden-sharing,the unobservable
impliedprices of officialdebt need to be cstimated.
The authorsfirstanalyze how,in a seniority-based
corporatedebt model,informationon these implied
pricescan be recoveredby lookingat the differential
impactof variousstocks of debt on the market price.
They analyze the validityand drawbacksof this
modelfor the sovereigndebtcase andconcludethat
senioritysharingrules are probablynot appropriate.
They then showthat impliedprices are still identified
undermoregeneral sharingrules, whichallowsus to
relax that assumptionand still be able to derive
relevantinferences.A suitablemulticreditordebt
valuationmodel,dependenton the stockof private
debt and !hedebt sharesof variouscreditors,is then
derivedand estimated.
The empiricalestimationsshow weak effectsof
the officialdebt stockson the market priceand
suggestthat the'impliedpricesof officialcreditorsare
lowerthan the marketprice,especiallyfor multilateral creditors.This findingimpliesthat official
creditorshave, relativeto private creditors,absorbeda
larger burden,especiallymultilaterals.But it does not
implythat officialcreditorsare weakeror less senior:
officialcreditorsmay be unwilling,rather than
unable,to exercisetheir substantialenforcement
powerfor the sakeof nonfinancialobjectives.Two
qualificationsto the findingson impliedprices: First,
the "singlecollateral"assumptionof corporatedebt
may not be applicableto sovereigndebt. The evidence may alsobe consistentwith undiscounted
officialimpliedpricesif officialcreditorshave
independentenforcementmechanismsnot availableto
privatecreditors.Second,the class of admissible
si,aringrules used for identificationgeneralizesthe
seniorityrules but may still excludethe relevant
sharingrule.
The Policy Research Working Paper Series disseminates the findings of work under way in the Bank. Anobjective of the series
is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and
I conclusions in these papers do not necessarily represent official Bank policy.
Produced by the Policy Research Dissemination Center
Table of Contents
I.
Introduction
2
II.
Relative Performance of External Creditors during the Debt Crisis
4
III.
Background and Definitions
5
IV.
Equal Burden Sharing Implications
8
V.
A Multi-Creditor Debt Valuation Model
9
Generality and limitations of the model
13
Empirical Evidence
15
VI.
VII. Conclusions
17
Refeiences
19
Tables
20
Appendix
26
2
I.
INTRODUCTIL.N
This paper seeks to determinehow the burden of the debt crisis is being shared among different
creditors, particularly private creditors, multilateralcreditors, and bilateral creditors. Burden sharing
amongcreditors is not a well defined concept. One popularmeasure of how the burden is being shared
is given by the observed trends in the changing compositionof the external debt portfolio of debtor
countries, which is a reflectionof the financialflows connectedto debt service and new lending as well
as debt conversions. Significantas these trends may be for the evolution of the debt crisis, burden
sharing cannot be measuredby simply lookingat net transfers receivedor new moneyprovidedby each
creditor class. Determiningburden sharing amongcreditorsrequiresdeterminingcapitallosses and gains
in their stock of debt.
This paper addressesthe issueof how capitallossesand gains are shared by creditors. However,
this issue is still narrow since, while private creditors only care about their financial position, official
creditors have other concerns as well, such as the development impact in the case of development
institutionssuch as IBRD. Nevertheless,a purely financialanalysisis useful because financiallosses in
a given countryreduce lending capacityelsewhereand therefore result in an additionalconstrainton the
optimal allocationof funds for developmentor other relevantpurposes. It should be emphasizedat the
outset thatpreciselybecause internationalfinancialinstitutionshave non-financialgoals to which financial
returns are subsidiary, their performance should not be evaluatednarrowly from a financialviewpoint.
To the extent that the best policy suited for their purpose is followed, which may implyfinanciallosses,
they would remain useful institutionsand, therefore, the support of their shareholderscan be expected.
The credit rating of these institutionsis determinedby this backing, both through explicit and implicit
guarantees. Therefore credit ratings of IFIs depend on good performance with respect to their specific
objectivesand not on financialperformance alone. In the case of official creditors, financialreturns are
one componentof the analysisrather than the bottom line. This paper only focuses on this component.
Capitallosses arise becausethe financialvalue of debt claims, as measured by the presentvalue
of the resourcesthat the debtor can be expectedto make availablefor their service, can fall below its face
value'. While the secondarymarket price of debt reflects the capitallosses on debt held by commercial
banks, the absenceof a market makesthe correspondingprice of officialdebt claims unobservable. How
the implicit price of official debt and the price of private debt relate is controversial:while some opine
that official creditorsare implicitlymore senior, others think that they have a weaker bargainingposition
and are consequentlyless senior.
The literatureon burden sharing is very scanty. Dooley (1990) wasthe first authorto emphasize
that a financially sound measure of burden sharing among creditors needs to look at the capital losses
made on outstandingdebt. He constructs a measure of burden in terms of the rates of return on total
claims. However, a fundamentallimitationof the Dooley analysis is that it is basically an accounting
framework. Simulationresults depend entirely on the assumed relative seniority between official and
private creditors. The issue of seniority of official creditors, and of multilateralsin particular, is not
addressed, which makes the simulationsless useful.
'This disregardsother factorsaffectingthe financialvalueof debt, such as the implicitdepositinsurancesubsidy
that commercialbanksreceiveby holding impaired debt claims. Note that in this case the financialvalue of debt
would overestimatethe country's expectedpayments.
3
Althoughthere are manywhobelievethat officialcreditorsare more senior thanprivate creditors,
Sjaastad (1990) and more recently Bulow and Rogoff (1991) have questionedthe World Bank's senior
creditor status.2 Finally, Berthelemyand Vourc'h (1991) empiricallyestimate burden sharing among
creditors. However, their estimated value of official claims is based on the assumptionthat official
creditor claims are impaired. Thus they estimatethe abilityof capturing net transfers in the future based
on the analysis of the net transfers creditors have been able to extract in the past, and show that the
burden is being shared in inverse relation to the proportion of net transfers received from debtor
countries. However, there is no real basis for this assumption.
This paper addressesboth the relative seniority and burden sharing of different creditor classes.
The implied prices for equal burden sharing during the debt crisis are derived. A ranking of implied
prices for different creditor groups is estimatedwithin a multi-creditorvaluationmodel of private debt
that does not assumethe existenceof a senioritystructure. Burden sharing amongcreditorsis determined
based on these impliedprices. Our valuationis forward looking, i.e., it is based on future expectednet
transfers rather than past net transfers.
The paper consists of seven sections. The next section discusses the relative performance of
externalcreditors during the debt crisis, analyzinghistoricaltrends. Section III defines -iIeconcept and
measureof burden sharing and SectionIV derives implicationsof equal burden sharing during the debt
crisis. Section V constructs an analytical multi-creditordebt valuation model, which is empirically
estimated in SectionVI. Finally, section VII concludesthe analysis.
2Afterthe firstdraft of
thispaperwaswritten,twomore pieces makethe case of equalsenioritybetweenprivate
and official creditors followingsimilar methods: Bulow, Rogoff, and Bevilaqua(1992) and Cohen (1992). This
paper discusses the restrictive assumptionsthat are needed to justify those methods, which are implicit in both
papers.
4
II.
RELATIV7E
PERFORMANCEOFEXTERNALCREDITORSDURINGTHEDEBTCRISIS
Performanceof different creditorsduring the debt crisis has been sharply differentiated.In what
follows, a comparativeanalysislong-termdebtof multilateral,bilateral, and private creditorsis presented.
This presentationdiscriminatesbetween SeverelyIndebtedMiddle IncomeCountries (SIMICs)and nonSIMICs(the rest of the developingcountriesexceptthose not credit constrained),followingthe definitions
in World Debt Tables unless otherwise indicated.
The level of developing country external debt has increased and its composition changed
substantiallyover the course of the debt crisis. It is clear that since the beginningof the debt crisis in
1982, multilateral creditors are the ones increasing their exposure the fastest, private creditors are
retrenchingand bilateral creditorsare in between. This has led to substantialchangesin the composition
of external debt portfolios as shown Table 1: the share of multilateralcreditors persistently increasesat
the expense of the share of private creditors. Bilateral creditors also increased their share overall,
althoughit slightly decreased in non-SIMICs.These changesare more marked in the SIMICs, where the
proportionof multilateral and bilateral credit in private credit grew,in the period 1982-1989,from less
than 10% and 20% to more than 20% and 40% respectively.
A substantialpart of the growth in debt stocks expressed in dollars is due to the fact that on
average the dollar depreciated in relationto other currencies in which extemal debt is denominated.If
debt stocksare correctedby valuationchanges3 , lower stocks are obtained. In particular, private creditors
in SIMICs would have had a reduction in exposure. As shown in Table 1, in this case the share of
multilateral creditors would have been even higher in both SIMICs and non-SIMICs.In particular, the
proportion of multilateraldebt in private debt is even higher consideringthese adjusted debt stocks (the
opposite is true for bilateral creditors). The fact that in share terms private creditors decreased their
exposuremeasuredin dollars at the expenseof officialcreditors,particularlymultilateralcreditors, cannot
be attributed to lower exchangerate capital gains but to their performance in relation to the amount of
net transfers they have extractedfrom debtor countries.
Figure 1 shows net amountstransferred in relation to outstandingdebt, which is the key factor
explaining the evolution of adjusted debt stocks. While private creditors have been extracting net
resources sincethe beginningof the crisis at sizablerates, by and large officialcreditors, and in particular
multilateral creditors. have been providing net resources which have partially compensatedthe private
creditors extraction.
Another interestingdimensionof the process relates to arrears. Arrears have been accumulating
at a rapid rate, as shown in Figure 2. It is very clear, however, that they have been falling mostly on
bilateral and private creditors, while multilateral creditors have managed to avoid arrears to a large
extent4 . Arrears are for the most part a problem of SIMICs. In this group of countries, as of the end of
19b0, accumulated arrears represent around 20% of bilateral and private debt and around 5% of
3 Valuation
changeswereestimated
as thedifferencebetweenthechangein thestockof debtaugmentedby debt
reductionon the one hand,and net flowsand interestrescheduled
on the other. Thereforewhatis reportedunder
valuationchangesincludeserrorsand omissions.
41tshouldbe noted that the
previousdefinitionof arrears includesnot only accumulatedinterestarrears, as
reportedin WDT,but also theircapitalization
(at ratessimilarto theoneson currentservicedue).
5
multilateraldebt. The record aboutreschedulingsis similar to the one discussedfor arrears: multilateral
creditors have not rescheduleddebt, whileprivate and bilateral creditors have done it repeatedly.
This picture is consistentwith multilateralcreditors providingpositivenet transfers in retribution
to full debt service and private creditorsextractingnet transfers through receivingpartialpaymentof debt
service due, which is renegotiated in the form of a rescheduling agreement or arrears. The case of
bilateral creditors falls somewherein between.
III.
BACKGROUNDAND DEFINITIONS
In this section we start the analysisof the evidenceby lookingat claims held by private creditors
and measuringtheir losses.We then generalizethe conceptsto officialcreditorsand defineburden-sharing
amongall of them.
Let D[tl be the face value of private debt claims at the end of period t and V[t] its financialvalue.
Let p[tI=V[t]/D[t] be the impliedprice of face value debt. If a secondary market for debt exists, p[t]
would be the market price5 and V[t] would be the market value of debt, that is the opportunitycost of
holdingthe claims. Let T[t] be the net transfer receivedfrom the debtor at the end of period t. Then the
realized rate of (economic)profit x is such that:
(1)
1+x = (V[t]+T[t])/((1+i)V[t-1]))
(p[t]D[t]+T[tl)/(( + i)p[t-l]D[t-11))
where i is the market discountrate in periodt (the opportunitycost of holdinga unit value during period
t). In market equilibrium,the expectedrate of profit x is zero.
In order to analyze how losses may come about, consider first the simplest case where debt
service obligationsare always honored. In this case the financialvalue of claims, that is their mEiket
value, is the expected present discounted value of contractual debt service. Assumingthat there is
competition among creditors, this value coincides with the face value of debt. In other words, the
competitive market rate i is charged and expected p[t]=1 for all t. Then expected x=O because
(D[t]+T[t])/((1+i)D[t-1]))=1. In this case with no sovereignrisk, these equalitiesalso hold ex-post if
it is assumedthat future market discountrates are certain, which we assumein what follows in order to
focus on sovereignrisk. It is easy to check that in this case the expectedprofit rate x is unaffectedby
the transfer T[t] made under the particular debt service scheduleof the contract, because the associated
compensatorychangesin face value debt D[t] would be valued at par. In particular, new lendingat time
t would lead to zero profit. Therefore, lendingwould be voluntary and there should not be any difficulty
in reschedulingdebt service.
Suppose,by contrast, that with some positiveprobabilitycontractualdebt service may not be met.
If this possibilityarises for liquidityreasons but solvencyis not an issue (in the sense that debt obligations
would be expected to be met in the future if rescheduled),then the no sovereign risk case would still
apply and previously contracted obligations would be met by additional borrowing at risk-free rates.
However, if solvencyis uncertain sovereignrisk becomesrelevant. In this case, if solvencyconditions
5Likein stock prices, there
is a possibilityof pricebubblesnot reflectingfundamentalswhichwill be disregarded
for simplicity. It should be noted however that in no case can prices be below fundamentals(i.e the country's
expectedpresentvalueservice), becausein that case it wouldbe more profitableto hold to the asset and there would
be no seller. In other words, bubbles can only be explosive, as opposed to implosive.This implies that bubbles
cannot be an explanationfor low secondarymarket prices of debt.
6
deteriorate to the point that the market value of debt V[ti falls below face value debt D[t], ex-post p[t]
would consequentlyfall below unity. To the extent that p[t-1]= 1, lending at time t-1 is voluntary and
therefore, as before, x is expectedto be zero by virtue of lenders' competition. In this case, however,
a risk premium r needs to be chargedin order to compensatefor the possibilitythat x be negativeex-post.
The feasibilityof this risk-offsettingpremium, in turn, wouldjustify the voluntary nature of the lending
under these circumstances.
Supposefor simplificationthat loans are made for one period in the amount D[t-11and that, as
perceived at t-1, an adverse shock imposing a ceiling S on present value debt service from period t
onwardswill occur with probabilitys. Then the contractualdebt service at periodt is (1+i)(1 +r)D[t-1].
If the shock does not occur, the rate of profit r is realized. If it occurs. a negative rate of profit
h=S/(1+i)D[t-1]-1 is realized(under the assumptionthat S<(1+i)D[t-1]). Here the rate of profitx may
take the values r or h dependingon the state of nature. In equilibriumzero expectedprofits obtain, and
therefore E[x]=(1-s)r+sh=O, which determinesthe risk-premiumr. Therefore pit-1]= 16.
The most extremecase of sovereignrisk is when no feasible interest rate premium compensates
sovereignrisk. In this case, prices fall below unity. Since an additionaldollar lent would lead to a capital
loss, no voluntary lending takes place, the countryis credit rationed, and creditors attemptto withdraw.
How this may happen can be illustratedby the situationthat would emerge after the previouslydescribed
shock occurs: since S is not enoughto recover contractualdebt obligationseven if rescheduled, once the
transfer Tlti is made the remaining resources B=S-T[t] are not enough to cover remaining debt D[t].
Then V[t]=B and p[t] < 1. More generally,the presentvalue of net transfers is a randomvariable which
is truncated when all debt obligationsare paid. Let B be the expectedvalue of such distributionafter the
transfer T[t] is made. To the extent that B < D[t], credit rationing and p[t] < 1 obtain.7 Note that since
B is derived from a distributiontruncatedwhen contractualdebt is fully paid, in general B, and therefore
V[t], can be assumed to depend on face value D[t].
While how T[t] and B are determinedis in the realm of bargainingtheory and exceedsthe scope
of this paper, it can be generallyexpectedthat under these circumstancescreditorswill attemptto extract
the largestpossible T[t] period after period (see Fernandez-Arias(1991) for a discussion). Even though
competitionin lendingbreaks down, it should be noted that competitionin secondary debt markets still
ensure that ex-ante profit rates are zero, since market prices already incorporateexpectedlosses. Like
in the competitivecase where initialmarketprices are unity, lower-than-expectedfutureprices wouldlead
to ex-postnegativeprofits and a higher-than-expectedfuture prices would lead to ex-postpositiveprofits.
The above reasoningcan be generalizedto official creditors. There are two difficultieshowever,
one practical and one conceptual.Tha practical problem is that there is no market valuationof official
debt, which would be neededto compute(1). The conceptualproblem is that since official creditors are
not subject to competition,there is a weaker casefor some of the observationsmade for private creditors.
"in a constantprobabilitymodelwherethe probabilityof the adverseshockis alwayss until it occurs,the
previous reasoningcan be extendedfor all periods before the shock occurs.
7 1his implies that too high risk
repaid decreasessufficientlyfast.
premia are not feasibleor that the probabilityof all debt obligationsbeing ever
7
For example, lending by official creditors may not be profit-maximizing. This may occur by design,
becauseofficial creditors may look at dimensionsbeyond narrowly defined financialresults. It may also
occur because of the lack of market controlson poor performance, such as stock quotationsor buyouts.
This may reflect in appropriaterisk-premi..not being charged when non-negativeprofits are feasible. It
may also reflect in willingnessto lend when the optimal strategy, from a purely financialpoint of view,
would be to attempt to withdrawas private creditors do. A strategy which is suboptimal from a narrow
financialpoint of view may be globally optimalfor a creditor governmentor a developmentinstitution.
The case can be madethat performanceof officialcreditorsshould be measuredin a more comprehensive
way. An attemptto do so may hide poor performance, however. Here we prefer to stick to our financial
measure of burden and rate of profit k3epingin mind its limitations. This purely financial measure has
the additional advantageof leading to an unambiguousdefinitionof burden-sharing, which would be
subjectiveif idiosyncraticfactors were introduced.
With these considerationsin mind, formula(1) canbe also appliedto officialcreditors. Its content
is mostlyconceptual,however, becausethe imputedprice of debtp[.1 and its value V[.! ire not observed.
More generally, let j index creditor classes. Let Dj[t]be the facevalue of creditor j debt claims at the end
of period t ai.u -V--j-.j
uie expectedpresent discountedv;lue of its associateddebt service (giventhe lending
strategy followedby creditor j). Let pj[t1=Vj[t]/D,[tj be the impliedprice of face value debt. Let Tj[t]
be the net transfer receivedfrom the debtor at the end of period t. Then the realized rate of (economic)
profit in period t, xj[t-l,t] is such that:
(2)
1+xj[t-l,t] = (Vj[t]+Tj[t])/((l+i)Vj[t-1]))
= (pj[t]Dj[t]+Tj[t])/(( + i)pj[t-l]Dj [t-1]))
where i is the market discountrate in period t.
The rates xj can be interpretedas the gain per unit of originalvalue. In the contextof losses they
would be negative. Let x be the average profit rate computedlumping together all creditors. It is easy
to checkthat it is a weightedaverage of the profit rates xj weightedby weights wj, where wj is the share
of V,[t-1] in total value at the beginningof period t. In the case that profit rates xj are the same for all
creditors, and therefore equal to x, we say that profits are equally shared. Assumingthat x < 0, this is
the case of equal burden sharing. More generally,we say that the lower (themore negative)X,,the larger
the creditor j's share of the burden.
Expression (2) and the definitionof burden-sharingcan be extendedto cover a longer period
where a streamof transfers is made or received. Considerthe case where transfers are receivedover t-to
years. Let Tj[to,t1be the present value of the stream of net transfers to creditor j in the period (to,t)
discountedforward to period t.
8
Tlhen
(3)
1+xj[to,tJ= (Vj[t]+Tj[to,t])/((l+I)Vj[
3 t0 )
+ pj[t]Dj[tI/((1+I)pj[to]Dj[to])
Tj[tO,t1/((l+I)pj[tO]Dj[tOj)
where I is the discountrate for the entire period (tj,t).
Expression (2) is a particular case of expression (3) when to =t-1. Expression(2) can be seen as
a definition of marginal burden and leading to a definition of marginal burden-sharingin relation to
period t. Expression (3) can be interpreted as a similar concept but related to total burdens and
burdensharingover the entire period. Both concepts relate to gains or losses in reiation to the value of
claims in the base year. Therefore the marginal concept focuses on how the new iiurden is shared,
irrespectiveof how the past burden was shared. The total concept, in contrast, if appliecto a past period,
summarizeshow the total burden generated in the period was shared. It is easy to chec'- that xj[tk,t1=
xj[to,t-1]+ a[tO,t-l1.xj[t-l,t],where a>O is the ratio of the mark3t value of debt at t-I and at to. As
discussedabove, the marginalprofit rate xjft-l,t] has zero expectedvalue at time (t-1). Sincethen a[tO,t-1]
is fixed, total profit rate is a martingale and fo!lows a random walk. This implies that losses are
accumulatedover a period only through unexpectedadverse realizations.
IV.
EQUAL BURDEN SHARING IMPLICATIONS
In what follows we will use three creditor classes: private, official multilateral, and official
bilateral. The subindexj will be correspondinglysubstitutedby p,m and b. When a distinctionis made
only between private and official creditors, the letters p and o are used.
The debt crisis can be characterizedwithin the above framework. In the lending phase, say
between 1973 and 1982, risk premia were charged by private lendersto coverthe risk of adverse shocks
putting a binding constraint on the value of debt outstanding.In this period the implicit price of private
debt was unity, lending was voluntary and expectedprofits were zero. Until 1982 such a shock did not
occur, which led to positive ex-post profits. In 1982 a sufficientlybig adverseshock in terms of terms
of trade and interest rates occurred, which led to ex-postnegativeprofits in a great number cf/countries.
This situation remainsvery much unchangeduntil now, since in those countriesprivate lending remains
involuntaryand secondarymarket prices quote at a substantialdiscount. It should be remembered that
the ex-antezero profit conditionapplies in every period, whetherlending is voluntaryor not. Therefore
ex-post capital gains or losses during the entire period have been realized to the extent that unexpected
events occurred.
The ex-postgains of private creditorsbefore 1982may have compensatedthe ex-post lossesafter
that date. Even if this is not so, since ex-ante profits are zero and lending was voluntary before 1982,
ex-post losses should not be seen as meriting any particular compensation.In an ex-ante sense there is
no burden. In an ex-post sense there is a burden which depends on when we want to start accumulating.
The burden would be smaller, perhaps negative, if ex-post profits are accumulatedsince the beginning
of the lending boom in 1973. We leave that exercise for further research and concentrateon the ex-post
return obtained after the breakdownin 1982until 1989. This is done by using formula (3) to obtain:
(4)
1+x= T/(1 +I)V[19821 + V[1989]/(1+I)V[19821
T/(1 +I)D[19821 + p[1989]D[19891/(1+I)D[19821
where I is the discountrate for the entire period 1982-1989(the compoundedLibor rate in the period)
and T is the presentvalue of the net transfers receivedduring the period discountedforward to 1989.The
initial stock of debt is valued at par.
9
Applying (4) to private creditors, the first term can be interpreted as the fraction of initial
investmientthat private creditors have been able to recover by extractingnet transfers in the period. It
amounts to almost 50% for the SIMICs (0.4941). The return is higher than this, however, because the
capitalloss has not been completeand the remainingdebt has a positive value, which equals the expected
additional fraction that can be recovered in the future. Tle above caiculationrequires an estimate of
p[1 9891. For SIMICs this can be calculatedas a weighted average of secondarymarket prices in those
countries quotedat the end of 1989, where the weights reflect the importanceof each country in -1 ivate
creditors SIMIC portfolior. We obtain pg19891=0.294, which leads to a residual value of almost 20%
(0.1947). Then 1+x = 0.4941 +- 0.1947 = 0.6888. This implies that the rate of profit x=-31.12%
We now pose the questionof how the other creditors are doing and how the burden is shared.
To answer that question is not easy. It should be noted at the outset that burden-sharingamong
rs. net transfers
creditors cannotbe addressedby simplylooking at the trends describedin section While
is relevantfor the determinationof the burden absorbed by a particular creditor, it is necessaryto know
the remainingvalue of outstandingclaims in order to assess it. Since there is no market for multilateral
and bilateral debt, there is no direct market informationabout it The evolution of exposure, both in
levels and shares, as well as the record of arrears and reschedulings,may provide indicationsto that
effect but are hardly conclusive.Beforeturningto the discussionof this issue, we apply (4) and compute
the implicitprice of multilateraland bilateral debtwhich wouldlead to equalburden-sharingamongthem
and private creditors for SIMICs. Equal burden-sharingis defined as one in which losses in a given
period are proportional to the original value invested, that is to say, one in which the ex-post rates of
profit are equal.
Since multilateral and bilateral creditors have been transferring resources in net terms to the
SIMICs during the period, the return derived from net transfers extraction is actuallynegative: -0.3017
for multilateral creditors (of which, -0.2811 for IBRD), and -0.143 for bilateral creditors. For equal
burden-sharingthe implicit prices as of end-1989would be 0.63 14 for multilateral creditors (0.529 for
IBRD), and 0.4653 for bilateral creditors (assumingthat the implicit price in 1982 is also unity). This
result indicatesthat for equalburden sharingbetweenIBRD and private creditors, IBRD claims must be
worth muchmore than those of private claims (23.5 cents more on the dollar). Only if IBRDclaims are
worth more than 52.9 cents on the dollar, private creditors would be sharing more of the burden
associatedwith the debt crisis. Similar qualitativeresults applyto other officialcreditors. This of course
includes the case where IBRD and other official claims are not impaired in any way, in which case
official creditors would not be suffering any burden at all according to this definition.
V.
A MULTI-CREDITORDEBT VALUATIONMODEL
After giving this backgroundinformationabout the range of numbers that equal burden-sharing
implies, we return to the conceptualproblemof determiningthe financialvalue of officialcreditor claimts.
One first problem is that part of the burden absorbed by officialcreditors is the grant element of their
concessionalloans, which are uxi'i -fitable by design. This would not apply to IBRD, however. More
generally, since they are not proti-maximizers, they cannot be assumed to follow the strategy that a
private creditor would follow. We are consciousthat to the extent that part of the financial losses are
purposely not avoided if other concernsare more important(such as large developmentreturns), the very
notion of financialburden may not be entirelyappropriatefor manypurposes.Nevertheless,here we will
81tis assumedthat pricesof commercial
banksapplyto all privatecreditors.
10
only consider the narrow issue of the financialvalue of claims and stick to the ur1nbiguous financial
definitionof burden-sharing.
One way to analyzethe problem of the value of officialdebt is to decomposeit intotwo elements:
the value that would be obtained if the entire debt were sold to a new private creditor, which following
Sjaastad(1990)we call its intrinsicvalue, and the rest, which can be attributedto the differentialcreditor
status of official creditors vis-a-vis private creditors. The intrinsic value of official portfolios does not
seem to be worse than private portfoliosin SIMICs. Reweighingthe secondary market index price for
SIMICsas of end-1989by the portfolio weightsof officialcreditors, we obtainthat the index is 0.33 snd.
0.29 for multilateral and bilateral debt respectively,which has to be compared to the private creditor
index 0.29. The situation for other countriesmay be different, but the absenceof widespreadsecondary
markets for their debts preventsthe applicationof similar methods.
Regardingdifferential creditor status the ei idence is less conclusive.While the evidence of low
incidence of arrears and reschedulingsin multilateraldebt may confirm that multilateralsare preferred
creditors, there are two counterargumentswhich seriouslyweakenthis conclusion.First of all, it can be
argued that the proposition has not been really tested because the multilaterals are willing to lend
voluntarily, and actually frequently provide positive net transfers. Whilc, receiving, or expec.ing to
receive, positive net transfers, debtor countrieswould fully service the debt to any creditor, even a nonpreferred one. The very willingnessof officialcreditors to lend may indicatethat they do rot think that
their claims are impaired. This argument disregards the distinct possibility that official creditors, not
being profit-maximizerslike financial institutions,may be willing to lend at some financialloss if other
dimensionsof their utility function are satisfied. In any event, what official creditors "think" is a much
weaker test than the market test to which private creditors are subject to. Second, a more cynicalview
of the same facts is that official creditors are forced to provide positive net transfers in exchangefor a
formal compliancewith scheduleddebt service.
The easiest model to consideris one where there is a fixed given pool of resourceQto be shared
among creditors. If in present value terms this pool amountsto less than the face value of total claims,
there is a conflict amongcreditors over how to share the loss. This model is consistentwith an ability
to pay model, where the pool representsthe availabilityof resources to service debt. To the extent that
there is uncertainty over the availabilityof resources, it may occur that in some circumstancesthe
resources exceed total debt claims. Since this excess will not be used to service debt, the relevant
probabilitydistribution of available resources is truncatedwhen all debt claims are fully serviced. The
relevant measure of ability to pay becomes the expectedpresent value of this distribution, which is
therefore a function of total face value. The model is generalized to the case of uncertainty by
consideringa given pool of resources equal to this expectedpresent value. To the extent that the pool is
smaller than the face value of debt, there are financiallosses to all the creditors combinedand conflict
among them as to how to share the loss.
The scanty literature on multi-creditorvaluationmodels has relied on ability-to-paymodels and
has modelledthe conflictamong creditors in terms of a seniority structure. In a seniority arrangement,
there is a pre-establishedorder in which each creditor class can claim and receive payment. This
frameworkof ability-to-payand senioritystructureis taken from the corporatedebt literature,where there
is essentiallyone unspecific collateral (the value of the firm) to be shared by creditors in the order
specified by the law. We will argue that this frameworkmay not be entirely appropriateto the sovereign
debt case and needs to be generalized. We start building our model by applying this corporate debt
11
frameworkto sovereigndebt, where for simplicitycreditorsare classifiedin only two classes:private and
official.There are three cases consideredin the literature:officialcreditorsare senior to private creditors,
official creditorsare junior to private creditors, and both classesof creditors have the same seniority and
share the loss equally (can claim in proportionto exposure).We now explain the implicationsof such a
model and later turn to the restrictivenature of its assumptions.
If the corporatesenioritymodel is applied to sovereigndebt, the total value of debt of private and
officialcreditors, V=Vp + V., depends only on total face value D=DP+D0 (the time indexis dropped for
clarity), as can be easily checked by lookingat the problem from the debtor's point of view, where the
order in which creditors claim is irrelevant. The value V increaseswith face value D, becausethere is
some probabilitythat the entire debt can be servicedas explainedbefore (this assumesthat the possibly
adverse effect of debt on the country's abilityto pay as a result of the so-called "debt overhang" is not
severe enough as to give rise to a debt Laffer curve). This probabilitycan be expectedto decrease with
face value of debt. Under these conditions,the value V is an increasing concave function of face value
D (startingat a 45-degreeline for low valuesof D). In Figure 3 this value functionV[.] is depictedunder
the assumptionthat official creditors are senior. In this case, the first portion of D is D. with a
correspondingvalue V0=V[DJ which can be read directly from the graph, as if no other creditor had
any claim. The second and last portion of total face value correspondsto private debt DP.Its value is the
residual value after the senior official creditors are satisfied: VP=V[D0 +D]-V[D,i=V-V 0 .
The imputed price of debt can be represented by the slope of lines OA, in the case of official
creditors, and AB in the case of private creditors. We note that due to concavity,the price of senior debt
is larger than the price of junior debt, and may be one at low levelsof debt where the value function is
a 45-degree line. Note that if the face value of a particular class of debt increasesby one unit, the price
of that class of debt always falls, be it senior or junior (it can of course remain at one at low levels of
senior debt). The effect on the price of the other class depends on seniority, however. If the class
increasing debt is senior, the price of junior debt will decline even more than with an own-class debt
increase, as can be seen by comparingthe slope of A'B' and AB'. If the class increasingdebt is junior,
however, no effect would be felt on the price of senior debt. If private debt is senior to official debt, the
graph and conclusionwould be obviouslyreversed. Finally, if both classes share the burden equally, the
price of their debts would be the same and wouldbe equally affected by changesin either class of debt.
This case amountsto assumingthat there is only one class of debt with face value D.
The above model and results can be generali:ed as follows. In the spirit of an ability-to-pay
model, we keep the assumptionthat there is a givenpool of resourcesto be shared. This only assumption
impliesthat total value V=V0 +Vp dependson total face valueD=D.+Dp, as opposedto both face values
separately.However, we dispensewith the senioritystructure assumptionand allow more general sharing
rules. In the contextof sovereigndebt, by contrastto the corporatedebt case, this generalizationappears
relevant because there is no applicable law determiningseniority. Since by definition Vj=pjDj, in an
ability-to-paymodel it holds true that
(5)
ppDp+p
4 D0 =V[D0 +DJ,
where the prices pj are functionsof both face values D. and Dp.
Partially differentiating(5) with respect to DPand D., and noticing that both derivativesof V[.J
are equal, we obtain:
(6)
pp-po= Dp(dpp/dD.- dpp/dDp)- D0(dp,/dD. - dp0 /dD0)
12
Notice that the comparisonof own-derivativesand cross-derivativescontain informationon the
implied price for official debt, relative to private debt, irrespectiveof the sharing rules. The intuition
behind these relations is similar to the analysis of the three seniority cases conducted above. The
implications, however, are not restricted to these three cases. Suppose more generally that the sharing
arrangementsbetween creditors are such that the resultingprices move together accordingto a function
p0 =s0 [pp].9 The three seniority cases can be accommodatedunder this assumption:p0 =O, p0 =pp, and
p0 =1. Other functions would reflect different sharing rules, not necessarily reflecting a seniority
structure. In particular, it may correspondto an implicit agreementas to how the burden is going to be
shared. The fact that identity (5) always holds severely restricts the set of admissible functional
relationshipsbetween prices if those functionsneed to apply over the entire range of feasible prices, to
the point that it is not clear whetherany meaningfulgeneralizationbeyond the three previous cases would
be achieved. However, sinceonly marginalchangesare considered, it only needs to be assumedthat this
stable relationshipholds in the relevant range of indebtedness,around the levels that have been actually
observed during the crisis. Therefore, although still restricted, this provides a meaningful
generalization.
Then dpJ/dDj=s.'dp,/dDj, where so' is the derivativeof p0 with respect to p,. Then:
(7)
pp-po= c(dpp/dD.- dpp/dDp),
where c =Dp + s.'D. > 0. Equations(5)-(7)can be generalizedto an arbitrary numberof officialcreditors,
for examplemultilateral and bilateral. Let sm..] and sb[.]be the correspondingprice-sharing functions.
In that case, two equations(7) would result, referring to the price gap of multilateraland bilateral debt
respectively: pp-Pm = c(dpp/dDm- dpp/dDp) and Pp-Pb = c(dpp/dDb - dpp/dDp), where
c=Dp+sm'Df+Sb'Db. The importantthing to notice is that c is the same in both equations.This implies
that the difference in prices is proportionalto the difference in the derivativesof the price of private debt
with respect to the correspondingdebt stocks. Sincethe constantof proportionalityc is the same for all
classes of creditors, the estimated marginalchange in the private price when the face value of debt of
various creditors change can be used to rank their implied prices. Positive correlation of the price
movements, as in the simple seniority cases analyzed, is a sufficient condition for c to be positive.
Assumingmore generallythat the functionss[.] are arbitrary distributionfunctions,that is non-decreasing
functionsmappinginto [0,1], c>0 and price gaps can be signed and ranked by lookingat the derivative
differential.
In order to arrive at an empirically estimable specification, assumptions on the sharing
arrangementsneed to be made. Assume(withoutloss of generalityin the contextof ability-to-paymodels
as described above)that the value of private debt Vp is:
(8)
ppDp= wV[Dp]+ (l-w)(V[D9 +DP]-V[DJ),
where w is a weight which might depend on the face value of both debts. The value of official debt V.
is obtainedby combining(5) and (8): p0D. = (1-w)V[D
0 ] + w(V[D.+Dp]-V[Dp]).Arbitrary sharingrules
can be generated by considering arbitrary weight functions w. Note that the three seniority cases
described above are special cases of this formulation.Private seniority is obtained with w= 1, official
seniority is obtained with w=O, and equal seniority and sharing is obtained for an intermediatevalue
w=w* vhich makes pp=p0 .
The weight w* is in general a function of both face values. Assumingthat the increasingand
concave value function V[D]= ADa, 0 < a < 1, it can be checked that w* is a function of the share of
9
AI
resultsgo throughif totaldebtD is also an argumentof the functionsol.].
13
relative exposuresf=Dp/D0 only. An interestingfamilyof multi-creditorvalue functionsis one where the
total value functionV[D]= ADa,0 < a < 1, and the weightw dependson relativeexposure (w[f]),of which
the seniority cases are special cases. Dividing (8) by Dp and manipulatingwe obtain:
(9)
pp = Ah[fl(Dpr ,
where h[fl is a function of relative exposure f (in the case of equal seniority, h[f]=(1 + 1,fH)W).In this
specification,the secondarymarket price dependsnot only on the face value of private debt (a decreasing
convex function, as impliedby the concavityof the value functio.n)but also on the share of private to
official debt. To the extent that, ceteris paribus, additionalofficial claims diminishthe value of private
claims and therefore their price, an increasingfunctionh[f] can be expected.
All of the above can be generalizedto the case of several creditors. In particular, if official
creditors are classified into multilateral and bilateral, then equation (9) is generalized by considering
f= DP/DD.fb=DP/Db,and h[fm,fb-(where the functionh is expectedto be increasingin both arguments).
In sectionIV, a version of (9) is empiricallyestimated,where the constantA is modelledin terms of time
and country-specificcharacteristicsand h[.1 is specified in a parametric way which provides a flexible
approximationto arbitrary sharing rules, of which the cases studied under the seniority model are
particular cases.
Generalityand limitationsof the model
To the extentthat the assumptionleading.toequation(9), which holds for senioritysharing rules,
is a reasonable approximationfor the true sharing rule, the analysis in equation (9) applies. In this
specification, while total value is a function of total face value, the recovery shares depend on relative
exposure in some arbitrary way. By specifyingthe estimatingequationunder these assumptions,we are
able to exploit the power of the single pool assumption,in the spirit of an ability-to-paymodel, while
retaining the flexibilityof arbitrary sharing rules.
A particular difficultyin this problem which this approach solves is that if official creditors are
not attemptingto fully withdrawlike private creditors, perhaps, but not necessarily,becausetheir claims
are not impaired, there is no strong connectionbetweenthe financial value of official claims V0 [t] and
current financial flows with the countries. If it is assumed that official creditors are attempting to
withdrawas much as they can given their institutionalconstraints,then the problem would be similar to
the one for private creditors and relatively straightforward:the future recovery couldbe estimatedbased
on the actual net transfers that official creditors have been willing and able to capture in the past. This
is in essencewhat Berthelemyand Vourc'h (1990)do, where not surprisinglythey show that the burden
is being shared accordingto their net transfers-debtoutstandingratio and that, therefore, private creditors
benefit at the expense of official creditors, particularly multilaterals. The premise that official debt is
impaired and that officialcreditors are exerting maximumpressure to extract net transfers has no basis
and needs to be substantiated,however. The abovemodel attemptsto examinethis issue withoutmaking
such unwarranted assumptions.
It should be kept in mind that officialcreditors may be willing to lend even if in so doing they
incur financiallosses. This model addressesthese financiallosses withoutmaking assumptionsaboutthe
motivations behind the official debt strategy. Financial losses may simply indicate that there are
overridingnon-financialconcerns,rather thanjunior status. The value of officialdebt need not have any
influenceon the value of private debt as long as officialcreditors are expectedto be willing to lend, for
good or bad financialreasons. This holds true even if officialcreditors are absolutelypreferred, as long
as they are not expectedto be willing to exercise their power. A strong negative relation between the
14
valuesof different creditors' debthas been typicallyimpliedin the contextof theoreticalmodelsassuming
that there is a seniority structure. The need for the assumptionthat official creditors are expected to
attempt to withdraw to maximize the recovery value of their claims in order to make valid inferences
about their status of preferred creditor seems to have gone unnoticed. Evidence of a weak effect of
officialdebt on the price of private debt may indicatethat officialcreditors are not expectedto withdraw
when they should accordingto purely financial criteria, rather than that they are not preferred creditors.
Nevertheless,the implicationsderived for the financialvalue of official claims remain valid irrespective
of the motivationsof their strategy as long as the market correctly anticipatessuch strategy.
Regarding limitations, this model makes assumptionsthat are justified in the case of corporate
debt but may be restrictive in the case of sovereigndebt. In the corporate case, the total value of the
resources that the debtor has availablefor creditors (V) is equal to the value of the value of the firm and
all creditors claim against this single collateral. Furthermore,the laws governingcorporate bankruptcy
determine that creditors share this single collateral according to a seniority structure: junior creditors
receivepaymentsonly after senior creditorsare fullypaid, and creditorsbelongingto the same class share
in proportionto exposure. In the sovereigndebt case, however, there is no enforceableinternationallaw
making the country's assets availableto external creditors and determining a seniority structure among
creditors. Why a country would pay and how much it can be extracted, both in total and in connection
to each creditor, is not entirely clear but is certainly in the realm of bargaining theory. Whether the
corporate debt model can be stilljustified is open to questions.
The model aboveassumesthat creditorsshare a givenpresentvalue of resources that the country
can be expectedto have available for them, in the sense that total value does not depend on the share
compositionof debt among creditors (V=V[D]). This assumptionis akin to the single collateral of
corporate debt. Even though in the sovereign debt case there is no sizeable collateral as such, this
assumptionmay still be applicable. To the extent that sovereigndebt service is fundamentallydetermined
by the country's ability to pay somehow defined, which by definition is not dependent on who the
creditors are, the assumptionappearsreasonable. If, alternatively,debtservice is determinedby the threat
of sanctions that creditors have at their disposal, then the compositionof debt among creditors may
matter. However, when there is a pool of sanctionswhich are available to all creditors whose punitive
effect does not depend on which creditor class applies them, which implies that once a creditor class
applies a sanctionthe other classes cannotdo additionalharm by applyingit, then, formally, the abilityto-pay model is still applicable. In this case the single collateralassumptionis also justified: the level of
resources for total debt service is determinedthrough a bargaining process between creditors and the
debtor country based on the penalties resulting from the applicationof the set of available sanctions,
which act as an implicit collateraldeterminingthe total value of debt claims.
If, by contrast, specific sanctions are available only to a particular class of creditor, or,
alternatively,sanctionsavailableto all of them retain some effectivenesseven if they are being exercised
by other classes of creditors, then to some extent the value of debt of each creditor class is determined
by its power to apply additionalpenaltieswhich need not be shared with other creditors. In the extreme
case where each creditor has availablespecificsanctions, not availableto other creditors, then the value
of debt of each creditor would depend only oa its own face value of debt, rather than total face value.
This would correspondto a corporate case where creditorshave specificcollaterals.In this extremecase,
debt of official creditors would not have any impacton the price of private debt. While in an ability-topay modelthat wouldbe an indicationthat the price of officialdebt is lower than the price of private debt
(officialdebt would be junior in a senioritymodel), in this model of creditor-specificcollateralsit would
15
provide no informationto make any inference. Evidenceof a weak effect of officialdebt on the price of
private debt may indicate that the true model is one where creditor-specificcollaterals are important,
rather than that the impliedprice of officialdebt is low (that officialdebt is not senior, so to speak). The
existenceof creditor-specificcollateralswouldbias downwardsthe impliedprices of officialdebt derived
from "ability-to-pay"models.
While the single collateralassumptioncan be justified under a variety of circumstancesin the
sovereign debt case, the assumptionof a seniority structure among creditors appears more difficult to
justify. Since no enforceableinternationallaw applies, even in the context of an ability-to-paymodel,
and certainly in a modelbased on the threat of penaltiesthat each creditor may apply, bargainingamong
creditors (perhaps over their shared power to exercise sanctions)woulddetermine the applicablesharing
rules. The assumptionof seniority sharing rules would be very convenientfor the purpose at hand
because it leads to testable implicationsrelating market price derivativeswith respect to stocks of debt
and implicitprices, but there is no reason to believe that actual sharing rules would mimic the outcome
of seniorityrules. In the model above, flexiblesharing rules, which include seniority rules as particular
cases, are allowed in order to approximatethe actualsharing arrangementswithin a family of admissible
sharing rules. We have been able to relax the assumptionof seniority sharing rules while retaining our
abilityto make useful inferencesby showingthat its basic implicationsstill hold if it is simply assumed
that prices are directly functionally related in the relevant range. This more general assumption,
however, is still restrictive and may rule out plausiblesharing rules.
An additionalissue is whetherofficial creditorscooperaterather than being rivals. To the extent
that in the last analysisthe industrializedcountriesare the importantdecisionagents in both cases, either
directly or through their role as shareholders,the cooperationargumentappears plausible. Still, it is not
clear what the outcome of such cooperation would be. Bulow and Rogoff (1991) argue that bilateral
creditors tend to bail out multilateral creditors from bad borrowers. If this were true, the depressing
impact of multilateraldebt on the price of private debt could be small because additionalmoney from
bilateral sources would be expectedin the future to cover obligationswith multilaterals.Therefore weak
effects of multilateraldebt wouldoccur eventhough multilateralcredit may not be impaired in any way.
The existenceof cooperative linkages between official creditors may lead to the derivation of wrong
inferencesfrom the above model in relation to the financialpositionof each individualofficial creditor
class. In the context of modelslike the one above where total value only depends on total face value, and
in particular, if the ability-to-payassumptionappliesto officialcreditors, this particular interactiondoes
not seem to add much to the determinationof the total value of official claims. While it would affect the
value of each individualofficialcreditor, like IBRD, it can be arguedthat this is not the most interesting
question. To the extent that industrializedcountries view the problem in a comprehensiveway, this
problem would amount to an irrelevantaccountingconvention.
VI.
EMPIRICALEVIDENCE
In this section we seek to determine empirically,how the burden of the debt crisis was shared
among different creditors. Contrary to the popular approach, we do not determine burden sharing by
looking at net transfers providedby each class of creditors. Instead, we analyzehow the price of private
debt relates to the face value of official and private debt, and derive a ranking of implicit prices for
different classes of debt. Finally, we discuss the implicationof these results for creditor seniority and
burden sharing.
16
We estimatethe price of private debt withina valuationmodelthat does not make any assumption
about the seniority structureor sharing rules, as discussedin sectionIII. Equation(10) is a parsimonious
empirical counterpartof equation (9):
(10)
log pp = log a - aiog libor + ce,log Dp + ci2 log Dp/Dm + %3log Dp/Db+ e
As specifiedin the valuationmodel, the equationincludesface value of private debt and relative
exposure of private creditors to multilateral and bilateral creditors. We also include a time trend and
countrydummyvariablesto capture other countryand time specificfactorsnot included in our theoretical
model."0 The last term e is the statistical error.
The model is estimatedusing annual data on 40 countries for the 1986-1989time period. Table
2 reports the estimationresults. It is interestingto note that only the private debt stock has a significant
effect on the secondary market debt price. As expected, the private debt price significantlydecreases
with increasesin private debt stocks. The estimatedcoefficientsof multilateralor bilateral debt stock are
of oppositesign: increasesin bilateraldebt stocksappearto decreaseprivate debtprice, whereasincreases
in multilateral debt stocks lead to its increase. Neither of them is significantlydifferent from zero,
however. As the F tests reported at the foot of Table 2 indicate, it is appropriateto enter debt stocksof
differentcreditors separatelyinto the regression. Their impactsare significantlydifferent, especiallyfor
private and multilateraldebt stocks. Finally, the discountrate libor developsa significantcoefficientthat
is not significantlydifferent from unity, as expected.
As explainedin section III, the differencebetween the marginalimpactof the face value of debt
of different creditors on the price of private debt reveals the difference between the imputed prices of
those claims. Because of the logarithmic specificationof the estimated equation, to get the relevant
derivatives, the log-derivativesreported in Table 2 are elasticitiesthat need to be multiplied by their
correspondingprice to debt ratios for each country.
Table 3 reports the calculatedderivativedifferencesfor each country in the sample. Dervative
differences are reported for 1989as well as average for the period 1986-89. The difference of the first
two derivatives(dp,/dD,-dp,/dDb)is equal to the difference betweenbilateral debt price and private debt
price (Pb-p.)times a positive constant c. The difference of the second pair of derivatives (dpM/dDPdpp/dDm)is equal to the difference betweenmultilateral and private debt prices times c. Table 3 shows
that there are only wo cases observed in our sample. The most common one, which holds for 26 out
of 40 countries is the case where both differences are negative, with the second one being greater in
absolute value. This implies a price rankingwith private price being the highest and multilateralprice
the lowest (Pm< Pb < pp). The other case, which holds for 14 out of 40 countries is the one where the first
difference is positive but the second is negativewhich implies that multilateralprice is the lowest but
bilateral price is the highest (p. <p,P < Pb).
In an earlier version of the paper we also experimentedwith other empiricalspecificationsincludingstandard
variablesin price equations,such as exports, gnp, net transfers, growth etc. However,since our central resultsdo
not change signi5cantly, we prefer the parsimoniousspecificationwhich remainswithin our theoreticalmodel.
10
17
The breakdown of countries with respect to their different price rankings is given in Table 4.
These rankings hold for the entire sampleperiod, except for Turkey and Philippineswhich shift ranking
in 1989. Our results indicatethat althoughthe rankingof pIlivateand bilateraldebt prices is not the same
across countries, multilateral debt price appears to be consistentlythe lowest for each country in the
sample.
In the context of seniority sharing rules, these results imply the relative seniority ranking of
creditors, with multilateralcreditor being least senior, and private or bilateral creditors the more senior
depending on the country. This result coupled with our burden sharing calculations of section IV
indicates that burden of the debt crisis is shared disproportionatelyby official creditors, especially
multilaterals.
VII. CONCLUSIONS
Burden sharing is essentiallydeterminedby the capital losses in the stock of debt of different
creditors, which arise becausethe paymentsthat creditorswouldbe able to extractfrom debtors fall short
of the face value of debt. While there is a market for private debt, official debt cannot be valued that
way. Unless an implicit ranking of the prices of different debt classes is estimated,how the burden of
the debt crisis was shared remainsvery much a simulationexercise and the results obtained are based on
assumptionsmade about unobservableofficial debt prices.
Thispaper seeks to overcomethis problem. First an appropriateconcept and measure of burden
sharing is defined, the analytical framework is laid down, and the historical evidence is examined.
Second, a valuation model of private debt is estimated, without making any assumptions about the
existenceof a seniority structure. A rankingof impliedprices is obtained from this estimation. Based
on the definitionof burden and estimatedranking of debt prices, it is possible to derive conclusionsas
to how the burden of the debt crisis was shared.
In what follows we highlight our main results and limitationsof this analysis. Our calculations
of the ex-postburden for the period 1982-1989suggesttwo main results:
(i) The burden of the debt crisis was higher for official creditors than for private creditors
(defined as equal ex-post loss rates) unless the implicit price of official debt is, on average, sufficiently
higher than the price of private debt.
(ii) Among official creditors, the burden was higher for multilateral creditors than for bilateral
creditorsunless the implicitprice of multilateraldebt is, on average, sufficienctlyhigher than the implicit
price of bilateral debt.
In addition, our empiricalresults indicatethat:
(i) Multilateralor bilateral debt does not have a statisticallysignificanteffect on the price of
private debt whereas private debt significantlydecreasesthe private price.
(ii) Dependingon the country, impliedprices of private, bilateral, and multilateraldebt can be
ranked as pm<pb<pp or pm<pp<pb.
18
These results, coupled with our calculationson the ex-post burden after 1982 referred above,
would indicate that the burden of the debt crisis was not equally shared, with official creditors, and
1
especiallymultilateralscarrying a disproportionateshare of the burden."
It may be temptingto concludethatthe enforcementmechanismsavailableto multilateralcreditors
are less effective and that, in terms of seniority, they are junior to other creditors. This view is
unwarranted,however. First, as emphasizedthroughoutthe paper, we need to rememberthat the burden
sharing concept these results relate to is a purely financialone. Thus, a weak effect of official debt on
the price of private debt may indicatethat official creditorsare not expectedto withdrawbecauseof nonfinancial objectives, rather than lack of powerful enforcementmechanismsat their disposal and weak
creditor status. While we chose to apply the concept of financial burden because it is the only
unambiguousmethod which allows comparisons,the performance of official creditors may have to be
measured in a more comprehensiveway. Second, if there is cooperationamong official creditors such
that bilateral creditorsbail out the multilateralcreditors (as arguedby Bulowand Rogoff (1991), implied
prices for bilateral and multilateralcreditors may not reflect their creditor status. In this case the status
of multilateralcreditors may be lower and the status of bilateral creditorshigher than what our estimates
suggest. (Given the low impliedstatus of multilateralcreditors that was found, our results do not appear
to support this official cooperationhypothesison the surface.)
In connection with our burdensharing results, we should also underline the following two
qualifications:
(i)
Another interpretationof a weak effect of official debt on the price of private debt may
be that the relevantmodel in sovereigndebt is one of creditor-specificcollaterals, rather
than the unspecific, singlecollateralcorporatedebt model. If relevant, this qualification
would unambiguouslyindicate that the implied prices of official debt are higher and
possiblyunity; it may explain why officialdebt fails to develop a significantcoefficient
in our estimation.
(ii)
The inferences on impliedprices are made under the assumptionthat sharing rules are
such that impliedprices are functionallyrelated to market prices; if actual sharing rules
deviate significantlyfrom such case, effectsof officialdebt on the price of private debt
need not be closelyrelatedto the underlyingimpliedprices. If relevant, this qualification
would have an ambiguouseffect dependenton the nature of the relevant sharing rule.
Finally, it shouldbe notedthat the previous caveatsonly applyto the inferencesthat can be drawn
for the creditors' status and impliedprices of officialcreditors. In other words, the caveatsrelate to the
structural burden-sharing implications of the estimated model and the identificationof the relevant
structural parameters. From a non-structuralpoint of view, the multi-creditorvaluation model that was
specifiedappearsreasonablyflexibleandthe estimatedcoefficientsrelatingvarious determinantsof market
prices, including official debt stocks, appear robust. Therefore the estimated model appears to be a
suitable reduced-formmodel for the determinationof marketprices, which improvesupon previous work
by explicitly consideringnon-privatedebt claims.
" Since bilateralprice is higher than private price for some countries,bilateral and private creditors may have
shared the burden equally, or bilateralsmayhave carried less of the burden. The case for bilateralcreditors is not
as clear cut as the multilateralssince we only estimate the ranking, but not the actual prices.
19
REFERENCES
Berthelemy, J.C. and A. Vourc'h (1991). "Burden-SharingAmong Creditors of Defaulting Debtor
Countries," OECD DevelopmentCentre Working Paper.
Bulow, J. and K. Rogoff (1991). "Is the World Bank a Preferred Creditor?," Mimeo.
Bulow, 3;K. Rogoff and A. Bevilaqua(1992). "IFI Seniorityand Burden Sharing in the Former Soviet
Bloc," Paper prepared for the BrookingsPanel on MacroeconomicActivity, April 1992.
Cohen, D. (1992). "The Debt Crisis: A Post Mortem," NBER Conference.
Dooley, M. (1990). "BurdensharingAmong Creditors When Repayment is uncertain," IMF Seminar
Paper.
Fernandez-Arias, E. (1991). "A Dynamic Bargaining Model of Sovereign Debt," World Bank PRE
Working Paper #778.
Sjaastad, L. (1990), "The World Bank: Time for Reform?," Mimeo, Universityof Chicago.
20
Table1
SharesIn Lona-termDebtOutstandinaandDisbursed(LDOD)
LDOD
1989
1982-89
1989
1982-89
(Percent)
(Percent)
(Percent)
(Percent)
._._._
(Percent)
SIMIC
MULTILATERAL
BILATERAL
PRIVATE
BILATERAL
PRIVATE
ChangeIn
Adjusted(1)
LDOD
1982
LDOD
NON-SIMIC
MULTILATERAL
Adjusted(1)
LDOD
Changein
LDOD
_
7.53
15.33
77.14
12.78
25.44
61.78
21.87
42.92
35.21
14.23
20.74
65.03
54.5
53.25
-7.75
17.94
24.45
31.52
25.69
39.19
32.47
49.59
31.39
44.17
30.21
38.27
29.01
45.29
23
37.81
ALL
MULTILATERAL
12.34
18.74
27.44
20.38
43.05
BILATERAL
PRIVATE
23.25
64.42
28.48
52.78
35.58
36.98
25.18
54.44
30.63
26.32
Source: World Debt Tables
(1) LDODadjustedfor valuationchanges
21
Table 2. The Price of Private Debt and Official Creditors
r
Independent
Variables
libor
Dp_0
||
i
Coefficient
Estimates
0.879
.788*
Standard
T Values
Error
1.800
0.49
0.386
-2.04
Dp/Dm
-0.078
0.207
-0.38
DP/Db
0.374
0.310
1.21
| R'
0.97
F
#of obs.
68.25**
L126
p: dlog(pp)/dlog(Dp)
-0.49*
b: dlog(p )/dlog(Db)
-0.37
m: dlog(pd)/dlog(D,)
0.07
Fp=b=m
1.88'i
Fb-m
1.20
Fp.m
Fp=b
3.58*
0.08
Dependent variable is the secondary market price of private debt (pP). Log transformations of all
variables are taken. Not reported are the time trend and countrydummy variables. **, *, and # indicate
significancelevels of 1, 5 and 15 percent, respectively. p, b, and m stand for derivativesof log price
with respect to log private, bilateral, and multilateral debt. F statistics testing for equality of these
derivativesare reported at the foot of the table. The data set covers 1986-89time period and includes
40 countries. Variable definitionsand sources are given in the Appendix.
22
Table 3. The Difference in the Derivatives of the Price of Private Debt with Respect to Private
Multilateral and Bilateral Debt Stocks.
[Country
I Year
dPp/dDp-dpp/dDb
dpp/dDp-dpp/dDm
86-89
.0000116
-.000106
89
.0000163
-.000097
Argentina
86-89
89
.0000166
.0000058
-.000010
-.0000037
Bolivia
86-89
89
-.0000322
-.0000653
-.000056
-.000095
Brazil
86-89
89
.0000076
.0000033
-.000006
-.000003
Chile
86-89
89
.000150
.000123
-.000039
-.000044
Cote D'ivoire
86-89
89
.0000225
.0000036
-.00043
-.000007
Cameroon
86-89
89
-.0003209
-.0003439
-.000493
-.000481
Congo
86-89
89
-.0000489
-.0000510
-.000107
-.000103
Colombia
86-89
89
.0000238
.0000214
-.000067
-.000063
Costa Rica
86-89
89
.0000262
.0000186
-.000068
-.000061
Dominican
Republic
86-89
89
-.0000893
-.0000534
-.000174
-.000097
Ecuador
86-89
89
.0000382
.0000115
-.000043
-.000019
Egypt
86-89
89
.0001330
-.0001287
-.000143
-.000138
Gabon
86-89
89
-.0013275
-.0009567
-.001794
-.001220
Guatemala
86-89
89
-.0001829
-.0003656
-.000586
-.000741
Algeria
23
Honduras
86-89
89
_.0001873
-.0001900
-.000311
-.000277
Hungary
86-89
89
.0002105
.0003923
-.000107
-.000084
86-89
89
-.0004076
-.0004805
-.000511
-.000580
Liberia
86-89
89
-.0001317
-.0001136
-.000192
-.000164
Morocco
I __________________
86-89
89
-.0000642
-.0000437
-.000093
-.000063
Mexico
86-89
89
.0000275
.0000179
-.000006
-.000005
Mozambique
86-89
89
-.0000723
-.0000697
-.000098
-.000090
Malawi
86-89
89
-.0070890
-.0046302
-.007982
-.005239
Nigeria
86-89
89
-.0000169
-.0000165
-.000032
-.000029
86-89
I89
-.0000104
-.0000046
-.000016
-.000006
Panama
86-89
89
.0002307
.0000914
-.000107
.000041
Peru
86-89
89
-.0000026
-.0000017
-.000012
-.000007
Philippines
86-89
89
.0000050
-.0000023
-.000032
-.000031
Poland
86-89
89
-.0000121
-.0000070
-.000049
-.000036
Sudan
86-89
89
-.0000071
-.0000028
-.000011
-.000004
Senegal
86-89
89
-.0017147
-.0019513
-.001855
-.002044
Sierra Leone
86-89
89
-.0023494
-.0023479
-.002486
-.002484
Turkey
86-89
89
-.0000032
.0000097
-.000049
-.000038
l
___________________
Jamaica
______________
_
Nicaragua
_________________
24
Tanzania
86-89
89
-.0008376
.0009948
-.000875
-.001029
Uganda
86-89
89
-.0019542
-.0021220
-.002160
-.002313
Uruguay
-- ______________
86-89
89
.0018891
.0018708
-.000197
-.000162
Venezuela
86-89
89
.0001494
.0000755
-.000139
-.000049
Yugoslavia
l __________________
86-89
.0000353
.0000244
-.000037
-.000036
Zaire
86-89
89
-.0001555
-.0001381
-.000184
-.000160
86-89
89
-.0013263
-.0013705
-.001364
-.001411
l
__________________
Zimbabwe
I_______________
89
Variable definitionsand sources are given in the Appendix. In calculatingaveragederivativedifferences,
the dlog(pp)/dlog(Dj)figures reported at the foot of Table 2 are multipliedby pp/xwhere ppis the mean
private price and x is the correspondingmean private, multilateral,or bilateral debt figure for the period
86-89. The 1989 derivative differences are obtained in the same way, however instead of multiplying
by means, 1989figures are used.
25
Table 4. Ranking of Private, Bilateral, and Multilateral Debt Prices
Pm<Pb<Pp
Pm<Pp<P]
Algeria
Bolivia
Cameroon
Congo
DominicanRepublic
Egypt
Argentina
Brazil
Chile
Cote D'ivoire
Colombia
Costa Rica
Gabon
Ecuador
Guatemala
Honduras
Jamaica
Liberia
Morocco
Mozambique
Malawi
Nigeria
Nicaragua
Hungary
Mexico
Panama
Philippines*
Uruguay
Venezuela
Yugoslavia
Peru
Poland
Sudan
Senegal
Sierra Leon
Turkey*
Tanzania
|Uganda
Zaire
Zimbabwe
Price rankingswitchesto the other one in 1989. The calculatedderivativedifferencesfor each country
are given in Table 3.
*
26
Appendix
Variable Definitions and Sources.
Pp
Secondarymarket price for private debt. Average of year-endbid and offer
prices. SalomonBrothers and Euroweek.
Dp
Long term private debt includingprivate nonguaranteeddebt, bonds, and
commercialbank debt. World Debt Tables.
_______
_
Db
Long term bilateral debt includingsuppliers credits. World Debt Tables.
D,,
All multilateraldebt, concessionaland nonconcessional. World Debt Tables.
libor
Six-monthLibor rate. IMF InternationalFinancialStatistics.
Figurela
NET TRANSFERSAS SHAREOF LDOD
sIMICS
0.16
-0.05
1981
1982
|
1983
Bilateral
1984
1985
1986
Multilateral
1987
1988
IN Private
1989
Figure 2a
ARREARSFOR SIMICS
ACCUMULATED
In US$ Billions
70_
60 -
4030 20 10
0
1981
1982
1983
1985
1984
Bilateral
-
1986
Multilateral
1987
Private
1988
1989
Figurelb NET TRANSFERSAS SHAREOF LDOD
NON-SIMICS
-0.06.
-0.1
1981
1982
1983
1984
-Bilateral
i
1985
1986
Multilateral
1987
Private|
1988
1989
Figure 2b
ACCUMULATED
ARREARSFOR NON-SIMICS
20
in US$ Billions
15
/
10 -
1981
1982
|
1983
1984
Bilateral
1985
1986
Multilateral
1987
Private
1988
1989
FIh,t9Kg3
,
ST VALUe FUALC(J
/16ogI
3
v~~~~)~
V7 \e\l
7004~
~~~
spe_
vD I
I
I
Ip
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