Undisclosed Debt Sustainability
Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models in particular defaulting costs.
The paper does not reflect the views of the World Bank Group, the World Bank Board or any of the Governments represented by Fabio Kanczuk. Support from Harvard Business School research budget acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.