ABSTRACT
Debt relief initiatives are grounded on the assumption that a large external debt is a constraint for the development process of poor countries. The economic theory identifies a number of channels through which excessive debts could shrink economic development and GDP growth rates, at least going back to Keynes' discussion on the war reparation imposed to Germany. The debt overhang is defined as a situation in which creditors do not expect to be fully repaid because of the presence of a large stock of debt. The literature about the debt overhang theory starts generally from two papers by Krugman and Sachs; they analyze what happens to a country which is unable to service its debt payments in full without new borrowing. Using the basic assumption of non-linearities in saving, investment and production debt relief can have a positive effect on economic growth.
