The Overhang Hangover

The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt...

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Main Authors:	Imbs, Jean, Ranciere, Romain
Format:	Publications & Research
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCOUNTING BORROWING BUSINESS CYCLES CAPITAL ACCUMULATION CAPITAL FLIGHT CONTRACTUAL ARRANGEMENTS CREDITOR CREDITORS CROWDING OUT DEBT DEBT CONTRACTS DEBT FINANCING DEBT LEVEL DEBT OVERHANG DEBT RELIEF DEBT REPUDIATION DEBT RESCHEDULING DEBT SERVICE DEBT SUSTAINABILITY DEBTORS DISCOUNT RATES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTLOOK ECONOMIC PROGRESS EMPIRICAL EVIDENCE EXPECTED PRESENT VALUE EXPORTS EXTERNAL DEBT FACE VALUE FINANCIAL MARKETS FOREIGN BORROWING FREE RIDER FREE RIDER PROBLEM FUNCTIONAL FORMS GDP GLOBAL INTEREST GOVERNMENT EXPENDITURES GROWTH RATE INCOME INCOME LEVELS INEFFICIENCY INFLATION INTEREST RATE INTEREST RATES LAFFER CURVE MACROECONOMIC POLICY MACROECONOMICS MONITORING TECHNOLOGY MORAL HAZARD OUTSTANDING DEBT POLITICAL ECONOMY POPULATION GROWTH PRESENT VALUE OF DEBT PRICE STABILITY PROPERTY RIGHTS PUBLIC DEBT REPAYMENT RISK MANAGEMENT TERMS OF TRADE TRADE SHOCKS VALUATION
Online Access:	http://documents.worldbank.org/curated/en/2005/08/6133217/overhang-hangover http://hdl.handle.net/10986/8631

id	okr-10986-8631
recordtype	oai_dc
spelling	okr-10986-86312021-04-23T14:02:43Z The Overhang Hangover Imbs, Jean Ranciere, Romain ACCOUNTING BORROWING BUSINESS CYCLES CAPITAL ACCUMULATION CAPITAL FLIGHT CONTRACTUAL ARRANGEMENTS CREDITOR CREDITORS CROWDING OUT DEBT DEBT CONTRACTS DEBT FINANCING DEBT LEVEL DEBT OVERHANG DEBT RELIEF DEBT REPUDIATION DEBT RESCHEDULING DEBT SERVICE DEBT SUSTAINABILITY DEBTORS DISCOUNT RATES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTLOOK ECONOMIC PROGRESS EMPIRICAL EVIDENCE EXPECTED PRESENT VALUE EXPORTS EXTERNAL DEBT FACE VALUE FINANCIAL MARKETS FOREIGN BORROWING FREE RIDER FREE RIDER PROBLEM FUNCTIONAL FORMS GDP GLOBAL INTEREST GOVERNMENT EXPENDITURES GROWTH RATE INCOME INCOME LEVELS INEFFICIENCY INFLATION INTEREST RATE INTEREST RATES LAFFER CURVE MACROECONOMIC POLICY MACROECONOMICS MONITORING TECHNOLOGY MORAL HAZARD OUTSTANDING DEBT POLITICAL ECONOMY POPULATION GROWTH PRESENT VALUE OF DEBT PRICE STABILITY PROPERTY RIGHTS PUBLIC DEBT REPAYMENT RISK MANAGEMENT TERMS OF TRADE TRADE SHOCKS VALUATION The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, the authors depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, they ask whether, as the overhang level of debt is reached: (1) investment falls precipitously as it should when it becomes optimal to default; (2) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (3) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to preempt default and exact punitive interest rates. The authors find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing or the burden of debt. 2012-06-21T14:51:21Z 2012-06-21T14:51:21Z 2005-08 http://documents.worldbank.org/curated/en/2005/08/6133217/overhang-hangover http://hdl.handle.net/10986/8631 English Policy Research Working Paper; No. 3673 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ACCOUNTING BORROWING BUSINESS CYCLES CAPITAL ACCUMULATION CAPITAL FLIGHT CONTRACTUAL ARRANGEMENTS CREDITOR CREDITORS CROWDING OUT DEBT DEBT CONTRACTS DEBT FINANCING DEBT LEVEL DEBT OVERHANG DEBT RELIEF DEBT REPUDIATION DEBT RESCHEDULING DEBT SERVICE DEBT SUSTAINABILITY DEBTORS DISCOUNT RATES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTLOOK ECONOMIC PROGRESS EMPIRICAL EVIDENCE EXPECTED PRESENT VALUE EXPORTS EXTERNAL DEBT FACE VALUE FINANCIAL MARKETS FOREIGN BORROWING FREE RIDER FREE RIDER PROBLEM FUNCTIONAL FORMS GDP GLOBAL INTEREST GOVERNMENT EXPENDITURES GROWTH RATE INCOME INCOME LEVELS INEFFICIENCY INFLATION INTEREST RATE INTEREST RATES LAFFER CURVE MACROECONOMIC POLICY MACROECONOMICS MONITORING TECHNOLOGY MORAL HAZARD OUTSTANDING DEBT POLITICAL ECONOMY POPULATION GROWTH PRESENT VALUE OF DEBT PRICE STABILITY PROPERTY RIGHTS PUBLIC DEBT REPAYMENT RISK MANAGEMENT TERMS OF TRADE TRADE SHOCKS VALUATION
spellingShingle	ACCOUNTING BORROWING BUSINESS CYCLES CAPITAL ACCUMULATION CAPITAL FLIGHT CONTRACTUAL ARRANGEMENTS CREDITOR CREDITORS CROWDING OUT DEBT DEBT CONTRACTS DEBT FINANCING DEBT LEVEL DEBT OVERHANG DEBT RELIEF DEBT REPUDIATION DEBT RESCHEDULING DEBT SERVICE DEBT SUSTAINABILITY DEBTORS DISCOUNT RATES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTLOOK ECONOMIC PROGRESS EMPIRICAL EVIDENCE EXPECTED PRESENT VALUE EXPORTS EXTERNAL DEBT FACE VALUE FINANCIAL MARKETS FOREIGN BORROWING FREE RIDER FREE RIDER PROBLEM FUNCTIONAL FORMS GDP GLOBAL INTEREST GOVERNMENT EXPENDITURES GROWTH RATE INCOME INCOME LEVELS INEFFICIENCY INFLATION INTEREST RATE INTEREST RATES LAFFER CURVE MACROECONOMIC POLICY MACROECONOMICS MONITORING TECHNOLOGY MORAL HAZARD OUTSTANDING DEBT POLITICAL ECONOMY POPULATION GROWTH PRESENT VALUE OF DEBT PRICE STABILITY PROPERTY RIGHTS PUBLIC DEBT REPAYMENT RISK MANAGEMENT TERMS OF TRADE TRADE SHOCKS VALUATION Imbs, Jean Ranciere, Romain The Overhang Hangover
relation	Policy Research Working Paper; No. 3673
description	The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, the authors depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, they ask whether, as the overhang level of debt is reached: (1) investment falls precipitously as it should when it becomes optimal to default; (2) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (3) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to preempt default and exact punitive interest rates. The authors find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing or the burden of debt.
format	Publications & Research
author	Imbs, Jean Ranciere, Romain
author_facet	Imbs, Jean Ranciere, Romain
author_sort	Imbs, Jean
title	The Overhang Hangover
title_short	The Overhang Hangover
title_full	The Overhang Hangover
title_fullStr	The Overhang Hangover
title_full_unstemmed	The Overhang Hangover
title_sort	overhang hangover
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2005/08/6133217/overhang-hangover http://hdl.handle.net/10986/8631
_version_	1764407674943832064

The Overhang Hangover

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