COMMERCIAL BANKS AND LDC DEBT REDUCTION

This paper investigates the relationship between the probability of default of lesser developed country commercial bank debt and the level of debt reduction granted by commercial banks. The analysis tests this relationship by regressing debt reduction totals for 29 middle-income debtors on 11 default probability indicators over the years 1985 through 1993 and finds a statistically significant relationship between the expected probability of default and the level of debt reduction. However, the findings fail to determine clearly the overall direction of this relationship. Thus, the evidence is insufficient to support the conclusion that the banks have behaved systematically as if they believed a debt-relief Laffer curve existed.