Debt Crisis and Debt Cycle

Prof. Andrey Zahariev, PhD

• Theoretical model - according the theory of

external financing, there are three phases of
debt accumulation. As a result after third
phase the borrowing country became net
capital supplier to the rest of the world.
 A, Y Y’ with borrowing А’ with borrowing
Deficit of А (Absorption)
Y (Income)
Y=А without borrowing

Net capital
incoming flow
resources

G t (Time)

0 T0 t (Time)

D
D (Net debt)

Phase I
t (Time)
 A, Y
Deficit of А (Absorption) Y’ with borrowing
Y (Income) А’ with borrowing
Y=А without borrowing

Net capital Net payments

incoming flow
G
resources

t (Time)

0 T0 t (Time)

D
D (Net debt)

Phase II

Phase I
t (Time)
 A, Y
Deficit of А (Absorption) Y’ with borrowing
Y (Income) А’ with borrowing
Y=А without borrowing

Net capital Net payments

incoming flow
resources

G t (Time)

0 T0 t (Time)

D
D (Net debt)

Phase II

Phase I Phase III

t (Time)
 Theoretical model of debt crisis origin
a) Common liquidity country b) Net liquidity country
A, Y A, Y Y’ with lending

А (Absorption)
Y’ with borrowing А’ with borrowing
А (Absorption)

Y=А without lending

Y (Income)
Y (Income)

Y=А without borrowing Net capital

outgoing flow
Net capital А’ with lending
incoming flow

resources
resources

Deficit of
Deficit of

G t (Time) t (Time)

0 T0 0
t (Time) T0 t (Time)

D D
D (Net debt)

D (Net debt)

Phase I

Phase IV
t (Time) t (Time)
 Theoretical model of debt crisis origin
a) Common liquidity country b) Net liquidity country
A, Y Net Y’ with borrowing A, Y Y’ with lending
А (Absorption)

А (Absorption)
Y=А without lending
payments
Y (Income)

Y (Income)
А’ with borrowing
Y=А without borrowing А’ with lending

Net capital
Net capital Net receipts
outgoing flow
incoming flow
resources

resources
G G
Deficit of

Deficit of
t (Time) t (Time)

0 T0 0
t (Time) T0 t (Time)

D D
D (Net debt)

D (Net debt)

Phase V
Phase I Phase III

Phase IV Phase VI
Phase II
t (Time) t (Time)
 Theoretical model of debt crisis origin
a) Common liquidity country b) Net liquidity country
A, Y Y’ with borrowing A, Y
А (Absorption)

А (Absorption)
Y=А without lending
Y (Income)

Y (Income)
А’ with borrowing
Y=А without borrowing А’ with lending

Net payments Net capital Y’ with lending

Net capital Net receipts
outgoing flow
incoming flow
resources

resources
G G
Deficit of

Deficit of
t (Time) t (Time)

0 T0 0
t (Time) T0 t (Time)

D D
D (Net debt)

D (Net debt)

Phase V
Phase I Phase III

Phase IV Phase VI
Phase II
t (Time) t (Time)
 Bulgarian Brady deal
The agreement with the London club

Face Value of
Option: Allocated Debt
Bayback $1,027

FLIRB $1,658

DISC $3,730

IAB $1,858

Total: $8,273
 Bulgarian Brady deal
Investment characteristics of Bulgarian Brady bonds

Bonds DISC FLIRB IAB

A mount of emission 1,85 Billion USD 1,658 Billion USD 1,611 Billion USD

Issuing date 28 July, 1994 28 July, 1994 28 July, 1994

M aturity 30 Years 18 Years 17 Years
Principal payments On maturity date 8 Years gratis period; 7 Years gratis
21 equal semiannual period;
principal payments 21 growing
started at 29 July, semiaunnual
2002 principal payments
started at 30 July,
2001
Interest payments LIBOR+13/16% 1-2 Y. - 2.00% LIBOR+13/16%
paid every 6 3-4 Y. - 2.25% paid every 6
months; 5 Y. - 2.50% months;
6 Y. - 2.75%
7 Y. - 3.00%
8-18 г.- LIBOR
+13/16% paid every
6 months