© 1993 International Bank for Reconstruction and Development / The World Bank
research-article |
Sovereign Debt: A Primer
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.
The troublesome debts of a number of developing countries have spawned a large literature on why countries borrow, on the extent to which debt contributes to growth, on why countries repay, and on how debt problems should be handled. This article provides a 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 maximization of a borrower in a competitive loan market facing an intertemporal budget constraint. Third, it introduces debt into recent models of endogenous growth and examines what these models imply about the relationship between debt and growth. Fourth, it discusses issues arising from sovereign risk. Fifth, it examines incentives to repay. Sixth, it reviews the various options available to a creditor facing a debtor unwilling to meet current debt service obligations. Seventh, it examines debt buybacks.