Working Paper: NBER ID: w26347
Authors: Laura Alfaro; Fabio Kanczuk
Abstract: Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models in particular defaulting costs.
Keywords: debt sustainability; non-paris club creditors; sovereign debt; China
JEL Codes: F0; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transformation of traditional sovereign debt model (F34) | reduction in sustainability of traditional creditors' debt (F34) |
| greater levels of original debt (H63) | increase in frequency of defaults (G33) |
| npc investors (G24) | reduction in sustainability of traditional debt (F34) |
| disclosure of npc debt (G51) | increase in welfare (I38) |
| incomplete information about npc debt (H69) | mispricing of default risk by international investors (G15) |
| mispricing of default risk by international investors (G15) | lower benefits from international credit markets (F34) |
| higher levels of npc debt (H69) | increased likelihood of default on international investors' debt (F34) |