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Is Debt Relief Efficient?




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    • Serkan Arslanalp is from the International Monetary Fund (IMF). Peter Blair Henry is from the Graduate School of Business, Stanford University, and National Bureau of Economic Research. We thank Manuel Amador, Jeremy Bulow, Steve Buser, Sandy Darity, Darrell Duffie, Nick Hope, Diana Kirk, Willene Johnson, Paul Romer, Jim Van Horne, Jeff Zwiebel, and seminar participants at the AEA Pipeline Project, Columbia, Duke, Harvard, the IMF, Stanford, UCLA, UNC-Chapel Hill, the US Department of State, and the World Bank for helpful comments. Rania A. Eltom provided excellent research assistance. Henry gratefully acknowledges financial support from an NSF CAREER Award, the Stanford Institute for Economic Policy Research (SIEPR), the Stanford Center for International Development (SCID) and the GSB Center for Global Business and the Economy. The views expressed in this paper do not necessarily represent those of the IMF.


When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms—a $42 billion increase in shareholder value. There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment, and growth. Since the market capitalization of U.S. commercial banks with developing country loan exposure also rises—by $13 billion—the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.