Working Paper: CEPR ID: DP1655
Authors: Raquel Fernandez; Sule Ozier
Abstract: Commercial bank debts of developing countries are held by a heterogenous group of banks. Here we focus on the distinction between large international money-centre banks and smaller domestic banks. In particular we investigate the role of debt concentration ? the amount of a country?s debt held by large banks relative to small banks ? on the secondary market price for these loans. Our empirical investigation indicates that concentration is an important determinant of secondary market discounts: higher concentration decreases the discount. An explanation for this finding is provided in the context of a bargaining model that endogenizes the level of the maximum penalty that banks can credibly threaten to impose on a recalcitrant debtor. We show that the banks? bargaining power increases with the degree of debt concentration, which in turn increases repayment and secondary market prices (and hence lowers discounts).
Keywords: sovereign debt; secondary market prices; discounts; bargaining power
JEL Codes: C78; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt concentration (G32) | banks' bargaining power (G21) |
| banks' bargaining power (G21) | repayment behavior (G51) |
| repayment behavior (G51) | secondary market prices (G10) |
| debt concentration (G32) | secondary market discounts (G12) |
| debt concentration (G32) | secondary market prices (G10) |
| higher concentration (D30) | lower secondary market discounts (G12) |