Bank Loans Versus Bond Finance: Implications for Sovereign Debtors

Author: Tanaka, Misa

Source: The Economic Journal, Volume 116, Number 510, March 2006 , pp. C149-C171(23)

Buy & download fulltext article:

Price: $48.00 plus tax (Refund Policy)

Abstract:

This article analyses the optimal choice between bank loans and bond finance for a sovereign debtor. It shows that if borrowers can be `publicly monitored' by a rating agency that disseminates the information about their creditworthiness, their choice between bank loans and bond finance is determined by the trade-off between two deadweight costs: the crisis cost of default and the cost of debtor moral hazard. If crisis costs are large, sovereigns use bank loans for short-term financing and bond issuance for long-term financing. I also demonstrate that state contingent debt and IMF intervention can improve welfare.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0297.2006.01081.x

Affiliations: 1: Bank of England

Publication date: 2006-03-01