Working Paper: CEPR ID: DP295
Authors: Ronald W. Anderson; Christopher L. Gilbert; Andrew Powell
Abstract: Securitization of LDC debt would significantly aid the international debt problem by increasing liquidity and expanding the range of investors. Securitization is problematic, however, in large part due to sovereign risks involved. At present sovereign risks, commodity price risks and currency risks remain unbundled in general obligation loan contracts. Using a game theoretic model we illustrate the need to separate sovereign risks from other risks and associate the sovereign default with a third party guarantee, whose fair-value premium can be calculated. We argue that issuing commodity price contingent assets may provide the best means of securitizing LDC obligations.
Keywords: LDCs; debt; sovereign risk; securitization
JEL Codes: 433
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sovereign risk (F34) | likelihood of default (G33) |
| likelihood of default (G33) | rescheduling (C78) |
| third-party guarantees (H81) | sovereign risk (F34) |
| commodity price-contingent securities (G13) | likelihood of default (G33) |