Is Debt Relief Efficient?

Abstract

When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms—a $42 billion increase in shareholder value. There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment and growth. Since the market capitalization of US commercial banks with developing-country loan exposure also rises—by $13 billion—the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.