Abstract: In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative. The program provided a multilateral debt relief to assure sustainable debt levels. To obtain the relief, HIPC had to show a track record of institutional investments to improve institutional quality. In this paper, I analyze the effectiveness of the HIPC Initiative through the behavior of private lending markets after HIPC relief. I propose two proxies for institutional quality perceived by private investors: the amount of funds lent and the sovereign default on those loans. Using data from 30 HIPC in the Sub-Saharan African region, I find that receiving the relief is positively correlated with lending from private investors, and negatively correlated with sovereign default in private sector funds. Since default expectations are key determinants of lending decisions and countries could self-select into the HIPC Initiative, I build a structural sequential dynamic discrete choice model with multiple sequential choices that includes observed and unobserved heterogeneity. Agents raise funds from multilateral and private sources and decide on institutional investment, default or repayment, the type of default, and the optimal debt allocations. The model captures a reduction in sovereign default on private bonds as an explanation of the equilibrium increase in the bonds' level. Robust analyses describe the importance of the design of the relief program into institutional quality improvements.

Abstract: In the African Financial Community (CFA) franc zones, a credible euro peg coexists with external debt denominated largely in U.S. dollars: euro–dollar fluctuations, exogenous to these small economies, directly raise the domestic-currency burden of debt. Panel regressions show that such depreciations raise sovereign default intensity by roughly 9%. In these same high-default years, consumption does not fall—evidence against the insurance motive of standard default models. I explain both facts by extending the partial default framework of Arellano et al. [2023] with foreign-currency debt, exogenous exchange rate shocks, and government heterogeneity. Exogeneity changes the nature of default: governments default not for insurance but opportunistically, exploiting the valuation gap between the higher debt burden and the higher revenue from new borrowing, generating a short-run rise in consumption. A policy counterfactual finds leaving for a self-managed dollar peg welfare-neutral on the financial side: opportunistic default insures the mismatch so effectively that a country profits from devaluations whatever their source, so the arrangement’s value lies not in shielding the debt but in the exogenous-devaluation environment that makes default opportunistic.