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https://hdl.handle.net/2142/22280
Description
Title
Three essays on secondary market debt prices
Author(s)
Singh, Manmohan
Issue Date
1994
Doctoral Committee Chair(s)
Villamil, Anne P.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Business Administration, Banking
Language
eng
Abstract
The Introductory chapter briefly describes the unintended emergence of the seconday market for developing country loans after protracted and unsuccessful negotiations between lending bankers and the indebted countries. The innovative Brady plan presented the banks involved in this market with several options for the exercise of their interests. These economic developments constitute a unique area of study open to continued anaysis because of the paucity of existing work.
Chapter 1, examines the determinants of Brady bond prices or prices of the consolidated par bond debt once a country finalizes a Brady agreement. The results show that liquidity variables like debt service/exports and reserve/imports are significant in the 1990s contrary to earlier studies in the 1980s (Boehmer & Megginson '90). It is also found that the fraction of private debt to total debt adversely affects the secondary market prices for Brady bonds. The study also uses the censored regression procedure (Heckman '76) to include non-Brady countries in the sample. The significant differences in the results upon analysis of the two samples reflects the credible future policy undertaken by the Brady countries.
Chapter 2 is in two parts. Part 1 explores a new way to look at the secondary debt market price of non performing debt. Panama, Peru, Ecuador, Bulgaria and Poland's debt prices were being traded as junk debt. Unlike in countries that have adopted the Brady plan, in these countries economic fundamentals do not explain the movement of debt prices. This was confirmed by the results of the Seemingly Unrelated Regression estimates (SURE). Part 2 of this chapter is an application to the anomalous secondary market price of Poland after its Brady agreement. An analytical model following Froot (1989) is used to explain the decline in Poland's debt price. The increasing role of traders as found in Part 1 is apparent in Poland's case as is an asymmetry of interests between the traders and the bankers.
Chapter 3 is on the foreign debt and secondary market price of Hungary. A case is made for debt relief for Hungary following Krugman's (1988) debt relief Laffer curve model. Shadow prices were constructed for Hungary's secondary market debt prices following inconsistency of such data on Hungary. Although Hungary was found to be on the wrong side of the laffer curve, the composition of debt is largely bonds historical the last debt instrument a country wants to default upon.
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