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The problem called debt overhang has recently been observed in international financial relations between a sovereign country and foreign commercial banks. The term “debt overhang” expresses the situation where a sovereign country has borrowed money from foreign banks and has been unable to fulfill the scheduled repayments for some time. We formulate this problem as a noncooperative game with the lender banks as players where each decides either to sell its loan exposure to the debtor country at the present price of debt on the secondary market, or to wait and keep its exposure. We propose two approaches: a one-period approach (Chapter II), and a direct dynamic approach (Chapter III). In the one-period approach, we consider a representative period, while in the dynamic approach, the whole dynamics is directly considered. Both approaches are consistent and complementary in that the first approach considers the effect of a large number of banks, and the second approach captures the dynamic nature of the problem. In the one-period approach, we consider the behavior of many banks. In the model with n lender banks, there are many pure and mixed strategy Nash equilibria. However we show that in any equilibrium, the resulting secondary market price remains almost the same as the present price when the number of banks is large. In addition, we discuss the structure of the set of Nash equilibria. The second approach is a direct dynamic formalization of the same problem with two creditor banks. We show that in the dynamic game there exist three types of subgame perfect equilibria with the property called the time continuation. We consider the relationships between the equilibria of the dynamic game and those of the one-period approach and show that the one-period approach does not lose much of the dynamic nature of the problem. In every equilibrium, each bank waits in every period with high probability, and this probability is close to 1 when the interest rate is small. If the price function of debt is approximated by some homogeneous function for large values of debt, then the central equilibrium probability becomes almost stationary in the long run. The stationary probability is relatively high as long as the interest rate is low. Finally, in Chapter IV, we consider the duration of debt overhang with two lender banks. We show that the equilibrium duration of debt overhang converges to a constant when the length of a subperiod tends to zero. The constant is large when the degree of homogeneity of the price function is high. When the degree of the homogeneity is low, the constant is close to In 2/ In β², where β is the annual interest factor. These results as a whole are interpreted as a tendency for the problem of debt overhang to persist over a long time. / Ph. D.

Thesis (Ph. D.)--Clark Atlanta University, 1991. / Includes bibliographical references (leaves 341-355).

This study attempted to examine the nature of the relationship between high levels of external debt and capital accumulation with the case study of Rwanda.

A thesis submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, in fulfilment of the requirements for the Degree of Doctor of Philosophy in Economics / This thesis focuses on sectoral growth composition, foreign debt and social welfare in selected African economies. Data for the study were obtained from International Financial Statistics (IFS), the World Bank (WB), United Nations Conference on Trade and Development (UNCTAD), United Nations Development Programme (UNDP) annual reports, and the Penn World Table (PWT). The thesis has 5 chapters. Chapter 1 is the general introduction. Chapters 2, 3, and 4 are stand-alone related papers on social welfare, external debt, and real exchange rate. Chapter 5 is the conclusion of the study. Chapter 1 presents the background to the study, the motivating problems, the research objectives and questions, the significance of the study, the literature gaps, and contributions. The chapter ends with an outline on the organization of the study. Chapter 2 examines the impact of the composition of growth on poverty and inequality in 36 African countries. Specifically, the study demonstrates how changes in the composition of growth can affect the welfare of the segments of the population that are socially and economically deprived. While previous studies have presented different results for different continents, much of the findings show that in Africa, the primary sector is the most effective sector that improves the levels of poverty and inequality. This study re-examines this claim based on the belief that previous findings suffer from measurement bias in the estimation of parameters. This study employed a measurement approach that corrected for the observed differences. The generalized method of moments (GMM) estimation technique was adopted, and the findings were robust, showing that rather than the much-touted primary sector, the secondary and tertiary sectors are actually the main drivers of welfare improvement in the African continent. It is therefore recommended that for a sustained welfare improvement strategy, policy-making institutions in Africa should as a matter of urgency adopt appropriate industrial policy targets on the secondary and tertiary sectors with specific focus on the construction, manufacturing, mining, wholesale, retail, and hotel sectors. vii Chapter 3 investigates the impact of growth composition on external debt (ED) in selected African countries. Precisely, the study examines how each of the three productive sectors (agriculture, industry, and services) impacts on the level of ED in Africa. While many development studies have relied on aggregate output growth to investigate debt-growth dynamics, received literature shows that studies which examine the impact of growth on ED are scarce. Relying on two frameworks – “perfect capital mobility” of the Neoclassicals, and the “Dualism” theory, this study investigates the composition of the growth-debt relationship in Africa. The study applies the dynamic generalized method of moments (GMM) estimation technique to conduct its analysis. The results show that the composition of growth has significant effect on the levels of ED a country can maintain. Although, the results were lagged at different periods, the outcome suggests that the industrial (construction and manufacturing) and services sectors (wholesale, retail, and hotels ‒ WRH) are the leading sectors that drive the growth-ED relationship. The result shows more robustness when a country’s institutional quality, real interest rate, and current account balance were controlled for. Chapter 4 examines the effectiveness of real exchange rate (RER) as a policy tool for industrial diversification. Economic experts have emphasized the need for industrial diversification, especially for developing countries. However, in spite of the numerous socio-economic gains associated with industrial diversification, little effort has been made in Africa to identify and develop the sectors that achieve higher output growth for the region. The effective management of real exchange rate (RER) has provided economies with the needed tool for achieving these growth objectives. Recent empirical literature finds that undervalued RERs help countries to achieve faster economic growth, while overvaluation of the RER slows economic growth. Furthermore, recent growth studies have shown that different sectors respond differently to changes in RER. This study shows that even though many of the previous works have drawn up policy recommendations from these researches, the findings may be driven by inappropriate estimation assumptions, which inevitably results in biased findings. When these assumptions are re-specified, the empirical findings for a sample of 36 countries suggest that in Africa, sectors such as agriculture, construction, mining and utility lead to appreciation of the RER, while the manufacturing, transport and communications, “WRH” sectors, and “other” lead to depreciation of RER among countries. Although the coefficients for manufacturing, and transport and communications are not significant, this is probably due to the levels of development of the sectors within the African continent. Improving the level of development in these sectors therefore through appropriate economic policy framework will certainly impact on the strength of the coefficients of the three sectors, thereby leading to industrial revolution. Chapter 5 concludes the study with a summary of the key findings from Chapters 2, 3, and 4 with highlights of the policy implications of the findings. The highlights include: (1) the need for policy frameworks that discourage continual channelling of resources into sectors other than the industrial and services sectors. (2) A policy thrust in favour of improving domestic sources of revenue through targeting specific subsectors of the industrial and services sectors with appropriate policy instruments. This will provide the needed resources that will reduce the high debt stock per aggregate national income of African countries. (3) A policy thrust that reverses the undermining of development in the manufacturing, and transport and communications sectors. The reversal will stimulate exports and aggregate economic growth through the policy of undervaluation of the RER. Concluding the chapter, the study suggests areas for further research. / MT2017

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