External and Domestic Debt Constraints of LDCs: a Theory with a Numerical Application to Brazil and Mexico

Abstract

In a psrevious work (1985), I have argued that most debtor nations need allocate no more than 15 per cent of their exports to the service of their debt in order to be declared solvent. Brazil spent twice this amount on debt service between 1983 and 1986 and — as a result — her debt-to-export ratio went down substantially (from four to three). An often-heard argument was that a debtor should hurry to bring down its debt-to-export ratio so as to allow ‘voluntary lending’ to resume. In other words, the debt-to-export ratio should go down, so as to go up later on! It is hard to think of any optimising model which would predict this result (except for short-term fluctuations).¹

Many thanks to my discussant Jon Eaton and to my ‘overviewer’ Rudi Dornbusch for their comments. Partial financial support from the Commissariat Général du Plan is gratefully acknowledged. This paper draws extensively on research undertaken while I was a consultant at the External Debt Division of the World Bank. Further results are reported in a companion paper (1987). I thank Violetta Rosenthal for her excellent research assistance, Nicholas Hope, Homi Kharas, Violetta Rosenthal and John Underwood for their numerous comments, and the External Debt Division for its very warm hospitality. The views expressed here do not necessarily represent the views of the World Bank.