Working Paper: NBER ID: w10217
Authors: Serkan Arslanalp; Peter Blair Henry
Abstract: When Less Developed Countries (LDCs) announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60 percent in real dollar terms a $42 billion increase in shareholder value. In contrast, there is no significant stock market increase for a control group of LDCs that do not sign Brady agreements. The results persist after controlling for IMF programs, trade liberalizations, capital account liberalizations, and privatization programs. The stock market appreciations successfully forecast higher future net resource transfers, investment and growth. Creditors also benefit from the Brady Plan. Controlling for other factors, stock prices of US commercial banks with significant LDC loan exposure rise by 35 percent a $13 billion increase in shareholder value. The results suggest that debt relief can generate large efficiency gains when the borrower suffers from debt overhang.
Keywords: No keywords provided
JEL Codes: F3; F4; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt Relief (F34) | Stock Market Appreciation (G19) |
| Debt Relief (F34) | Future Net Resource Transfers (F16) |
| Debt Relief (F34) | Creditor Benefits (F34) |
| Stock Market Appreciation (G19) | Future Net Resource Transfers (F16) |
| Debt Relief (F34) | Economic Reforms (E69) |