A conceptual approach to the analysis of external debt of the developing countries
ALIBER, R.
This paper postulates that debt crises might result either from solvency problems or liquidity problems. A solvency problem would mean that the real interest rate on the marginal external loan exceeded the increase in national income made possible by this loan. A liquidity problem would mean that the borrower would be unable to obtain the foreign exchange to make the debt service payments on schedule. The thesis of the paper is that the external debt of most developing countries will increase for the foreseeable future, and that crises occur when the refunding mechanism breaks down, either because the lenders are reluctant to extend new credits as they mature, or because the borrowers are reluctant to refinance due to the very high short-term effective interest cost. If borrowers expect that their domestic currencies may be devalued, they will delay refinancing to avoid the exchange loss.
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