THE DEBT LAFFER CURVE - SOME ESTIMATES

The existence of a Debt Laffer Curve has been used as an argument that it is in the creditors' collective interest to forgive some of the external debt of a heavily indebted country. The creditors would stand to gain from unilaterally reducing the debt when the debtor country is on the wrong side of the Debt Laffer curve. The side of the Debt Laffer Curve on which the debtor is also plays a crucial role in determining the benefits of market-based debt reductions schemes (such as buybacks and exit-bonds) for creditors and debtor. This paper presents some estimates, using secondary market prices of commercial bank debt, of the Debt Laffer curves for the highly indebted and sub-Saharan African countries. The empirical evidence suggests that only a few indebted countries are on the wrong side of their Debt Laffer curve. © 1990.