Resource title

Lending to insolvent countries: a paradoxical story

Resource image

image for OpenScout resource :: Lending to insolvent countries: a paradoxical story

Resource description

The paper considers the strategy of a bank faced with a severe case of default in its country-risk portfolio. Using a simple three-period adverse-selection model where bank managers have private information on the exact quality of their portfolio, it is shown that the bank's managers may choose to lend fresh money even to insolvent countries in order to keep them temporarily liquid on paper and postpone the spread of bad news onto financial markets. The concept of Wilson equilibrium is used to identify conditions under which such a strategy is viable

Resource author

Resource publisher

Resource publish date

Resource language

en

Resource content type

application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/Inseadwp1991/91-07.pdf

Resource license

Copyright INSEAD. All rights reserved