Endogenous Creditor Seniority and External Debt Values

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that the seniority of domestic debt improved at the expense of foreign bank debt during the late 1980s. This paper argues that this was the revenue-maximizing response of governments to capital flight that drained the domestic financial "tax base" subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. Econometric analysis implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: higher international interest rates.