Secondary Debt Research Articles

Liquidity and Feasible Debt Relief

This paper analyzes the determinants of secondary debt market liquidity, identifying conditions under which trading in competitive markets results in su‐cient ownership concentration to induce ex post e‐cient debt relief. The feasibility of debt relief is path-dependent, hinging upon interim economic conditions. Secondary debt markets are likely to freeze during recessions, precisely when trading has high social value. This is due to three factors: severe free-riding reduces proflts of large bondholders; uninformed small bondholders are reluctant to sell due to high informational sensitivity of debt; and large investors are more likely to face wealth constraints. However, there are potentially countervailing efiects facilitating trade in bad states. Speciflcally, recessions may cause a broader set of uninformed bondholders to face intense liquidity shocks. The intensity of such shocks encourages them to sell, while the breadth of the shock facilitates concentrated ownership. Both efiects ultimately promote voluntary debt relief by a large investor.

Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internationally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model confirms the conventional wisdom that delay increases with more creditors, and with the advent of vulture creditors. Contrary to conventional wisdom, putting collective action clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consolidate debt with high -- and disperse debt with low -- creditor bargaining power. Whether secondary markets reduce or increase delay depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.

Mécanismes de désendettement des pays en développement. Les implications de l'intervention des institutions financières internationales, en présence d'incitations à l'ajustement

L'analyse d'accords de desendettement, sous une contrainte d'incitation a l'ajustement, permet de definir les conditions sous lesquelles l'allegement des dettes conduit les pays debiteurs a accroitre leur solvabilite. Ces conditions dependent de la situation du debiteur et, notamment, du cout de l'ajustement demande, mais l'accord optimal est dicte par le mode d'allegement choisi. Les rachats de dette constituent une solution equivalente a une annulation des creances s'ils sont finances par des prets des IFI ayant un statut privilegie. Si les creances des IFI sont defavorisees, ces operations entrent en contradiction avec la situation du debiteur et conduisent les creanciers prives a refuser tout financement lorsque le cout de l'ajustement est eleve.

Securitization, liquidity, and the Brady plan

Securitization of bank loans is proposed as a solution to the ongoing debt difficulties for emerging market nations. This paper analyzes the effects of the Brady plan for four participating countries. In addition to resolving repayment problems, the plan had a statistically significant effect on prices due to its positive impact on liquidity. Previously, the market for traded bank debt was illiquid and dominated by a few large traders who depressed the price by exerting oligopsony power. By using Perron’s method of discerning breaks, it is found that the introduction of bonds led to structural change in the LDC secondary debt market. These effects are in addition to those of debt resolution and domestic reform.

Empirical models for secondary market debt prices

This paper extends earlier research regarding predictability of secondary market prices for sovereign debt certificates issued by developing countries. Due to the existence of a thinly traded market subject to potential outliers, parameter estimation is accomplished by means of a least absolute deviations methodology. Simulation results are compared with previously published forecasts where model coefficients were generated via threestage least squares. Both methodologies appear to be useful and combined forecasts may prove helpful in situations where neither technique dominates.

FINANCE FOR AUSTRALIAN SMEs: POLICY ISSUES

AbstractThe special financial needs of small business have long been a policy issue in Australia, with the claim often made that capital markets are less than fully responsive to this sector. This paper argues that despite financial deregulation, the small business sector is yet to fully benefit from improved supply of finance. The future reform process should not be jeopardised by precipitate policy changes (such as bank mergers) which could upset the delicate balance of forces currently emerging in the industry. Further, proactive policies are needed to encourage the growth of secondary debt and primary equity capital markets for small business.

Financing small business creation: The case of Chinese and Korean immigrant entrepreneurs

Conventional wisdom claims that entrepreneurship in the United States among Asian immigrants has been substantially promoted by the operation of rotating credit associations specifically and supportive social networks generally. The rotating credit association (RCA) typifies the process whereby supportive peer and community subgroups assist in the creation and operation of firms by providing social capital in the form of loans. One problem with the RCA as an example of social resources is that there is no solid evidence that it is a major source in financing immigrant-owned firms. This study utilizes data from the U.S. Bureau of the Census to analyze sources and amounts of start-up capital that financed small business creation for immigrant Koreans and Chinese. Data self-reported by over 2,000 Korean/Chinese who opened new firms during 1979–1987 are analyzed and compared with start-up statistics for nonminorities and Asian Americans who are not immigrants. The majority of start-up capital that financed small business formation came from family wealth (equity) and financial institution loans (debt). These financing patterns typified all groups. High levels of start-up capital typify Korean/Chinese immigrant-owned firms, reflecting their heavy reliance upon equity capital to finance small business creation. If no loan funds were forthcoming from friends, rotating credit associations, associates, family, and other secondary debt sources, the average Korean/Chinese start-up would nonetheless possess substantially more financial capital than its nonminority cohort. Looking solely at firms utilizing loan funds to finance business creation, Korean/Chinese borrowers had lower mean loan sizes and lower debt to equity ratios than the comparison group firms: the aggregate debt to equity ratios for nonminorities and Chinese/Korean immigrants were 2.75 and 1.18, respectively. Among the borrowing firms, financial institutions skim off the most attractive Korean/Chinese borrowers, mostly college graduates who invest substantial sums of equity capital into their start-ups. The nonbank borrowers—particularly those borrowing from friends—were most disadvantaged, relative to nonminority small business owners. Controlling for firm and owner characteristics statistically, the Korean/Chinese start-ups borrowing from friends and family were found to be penalized by over $25,000 in loan size, relative to nonminorities, whereas Asian nonimmigrant borrowers incurred no such penalty. Prevailing scholarly literature misinterprets the realities of how Korean and Chinese immigrant entrepreneurs finance entry into small businesses. These firms stand out for their particularly heavy reliance upon family wealth. Nontraditional debt capital sources are of secondary importance, and they are utilized more by the weaker start-ups.

Spectral analysis of secondary market mexican external debt prices

The secondary market for developing country debt currently is one of the fastest growing segments of the fixed income securities market. This paper examines the spectral properties of secondary market Mexican external debt price variations from January 1986–December 1992. The analysis presented in this paper suggests that the secondary market for Mexican external debt may be characterized by the "random-walk with drift" model. Moreover, large (small) spectral density estimates at high (low) periodicities suggest that secondary market price variations were positively autocorrelated and aperiodic in nature, although there is some evidence to suggest the possible presence of short-period harmonic resonances. Cross-spectral analysis of the relationship between the 10-year U.S. Treasury bond interest rate and secondary market Mexican external debt prices appears to verify the theoretical relationship between market determined interest rates for default-free, dollar denominated debt and secondary market debt prices. More importantly, estimated phase-lag relationships suggest that the secondary market for Mexican external debt probably was inefficient at the semi-strong level.

Secondary debt market fundamentals and policy implications for debt conversion: the Algerian case

Secondary debt market fundamentals and policy implications for debt conversion: the Algerian case

Debt for nature swaps — Overview and discussion of key issues

Debt-for-nature swaps involve the purchase of a developing country's debt at a discounted value in the secondary debt market and cancelling the debt in return for environment-related action on the part of the debtor nation. The present debt situation of many DCs possessing tropical forests is seen as an opportunity to trade off bad debts against habitat preservation. As long as the amounts at stake are marginal relative to a country's debt burden, arrangements such as debt-for-nature swaps may prove beneficial because the opportunity costs of the freed funds are very low. Once such swaps take place on a larger scale, however, additionality may no longer be that obvious to the debtor government. Perhaps the most important contribution of aggressive promotion of such swaps will be awakening of policy- and decision-makers to the many consequences of accelerating environmental degradation of many unique and fragile tropical habitats along with an increased awareness of the increasing opportunity cost of diminishing renewable resources. Such an awakening may, in turn, lead to a changed political climate for environmental management in general, and an increased scope for international cooperation.