External Debt to the Private Sector and the Price of Bank Loans

Abstract:     
Since the 1990’s, developing countries have privatized their manufacturing and banking sectors. As a result, a substantially larger share of external debt has been contracted by the private sector. We examine the effects on bank loan prices as a result of this major change in the international debt markets. We find that, in general, the private sector’s external debts negatively affect the price of bank loans. Yet this impact is mitigated by the presence of potential market distortions, due to, for example, fixed foreign exchange regimes that the private sector may benefit from, but which also can exacerbate any potential negative aspect. Even so, as a general rule, the private sector’s external debts promote financial stability. Adequate market conditions, however, should be implemented to prevent potential market distortions.

Number of Pages in PDF File: 29

Keywords: International debt crises, International capital flows, Private sector, Bank loans

JEL Classification: F34, G32

working papers series