Sovereign Debt: Is To Forgive To Forget?

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International lending to a less-developed country cannot be based on the debtor's reputation for making repayments. That is, loans to LDCs will not be made or repaid unless foreign creditors have legal or other direct sanctions they can exercise against a sovereign debtor who defaults Even if some lending is feasible because of direct sanctions, having a reputation for repayment in no way enhances a small LDC's ability to borrow.

Published: Bulow, Jeremy and Kenneth Rogoff. "Sovereign Debt: Is To Forgive To Forget?" from American Economic Review, Vol. 79, 1989.

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