Penalties and Exclusion in the Rescheduling and Forgiveness of International Loans

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Carlson, John A.; Husain, Aasim M.; Zimmerman, Jeffrey A.
Financial Market; Loans
article description
When a borrowing coutnry is reluctant to repay an international loan, the lender has few legal remedies but can impose penalty costs that harm the borrower rather than benefit the lender. If the lender can also temporarily exclude the borrower from new loans, the borrower with a sufficiently high time preference will agree to reschedule the loan. If the rescheduling condition is met, a contract which includes a contingency for partial forgiveness can be shown to dominate a contract without forgiveness.