Essays on the Latin American debt crisis

Essay I provides a simple model of the origins of the debt crisis of the 1980s. Contrary to the majority of international debt literature, this essay is built upon two new approaches. First, the costs of default may be random and are deadweight loss to the defaulted debtor especially in case of commercial lending. The second approach that this essay adopts is that a possibility of learning from the action (repayment/default) of a predecessor exists for the followers when they too have to make the decision about whether to default.; With the two new approaches, Essay I is able to illustrate the circumstance for the origins of the debt crisis. The main finding of this essay is if the signal that an 'expert' debtor receives is relatively precise, then the debt crisis is likely to occur. In case of relatively accurate signals, the bank may engage in the policy of overpricing of premium and overexposure in the investment stage since this policy may be the ex-ante profitable strategy for the bank. In return, this policy may invite the danger of crisis.; Essay II explains why money-center banks continued to make loans to problem debtors even after the crisis. In this essay, two banks (a money-center and fringe bank) have made a syndicated loan to a debtor country. In case of a default by the debtor, the money-center bank may cover the current debt service with new loans while the fringe bank escapes from this costly practice. The reason is that it is relatively too costly for the money-center bank to let the loan become non-performing. This essay provides some evidence to back up this argument.; Essay III provides a simple model of sovereign debt buyback when the debtor engages in the bargaining over repayments. Contrary to popular belief, a self-financed buyback contract can yield a Pareto-efficient outcome as this contract transmits valuable information to a third party. The existence of a third party can effectively facilitate the mutually beneficial buyback. This essay extensively considers the Bolivian buyback schemes. This essay also investigates partially assisted buyback schemes in which benevolent donors exogenously finance the buyback for debtors. Unless the level of assistance from donors is significant, the assisted buyback schemes may not help problem debtors.