Sovereign Debt: A Primer |
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| Authors: | Eaton Jonathan |
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| Institution: | Jonathan Eaton is in the Department of Economics at Boston University. He thanks Aditya Bhattacharjea, Zareen Naqvi, and Akiko Tamura for excellent research assistance and Ib Madsden, John Underwood, and the referees for comments and criticisms. The original version of this article was prepared for a course on external debt given by the Debt and International Finance Division of the World Bank. |
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| Abstract: | The troublesome debts of a number of developing countries havespawned a large literature on why countries borrow, on the extentto which debt contributes to growth, on why countries repay,and on how debt problems should be handled. This article providesa basic introduction to some issues in sovereign debt. First,it presents the basic accounting concepts associated with debt.Second, it treats debt as a component of the intertemporal maximizationof a borrower in a competitive loan market facing an intertemporalbudget constraint. Third, it introduces debt into recent modelsof endogenous growth and examines what these models imply aboutthe relationship between debt and growth. Fourth, it discussesissues arising from sovereign risk. Fifth, it examines incentivesto repay. Sixth, it reviews the various options available toa creditor facing a debtor unwilling to meet current debt serviceobligations. Seventh, it examines debt buybacks. |
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