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Sovereign debt buybacks can lower bargaining costs

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  • Rotemberg, Julio J.

Abstract

I develop two models in which debt repurchases by highly indebted sovereign nations are advantageous for all parties. The models are based on the idea that when sovereign debts are large, bargaining costs are large. Creditors spend more resources convincing the debtor that they are tough when they have more at stake. Also, the sanctions which are sometimes triggered when bargaining fails to produce an agreement are larger when debts are larger. For both these reasons buybacks, which reduce the face value of the outstanding debt, can be beneficial. The resulting equilibria are constrained Pareto Optima. But, donors who subsidize buybacks increase overall welfare more than donors who make direct gifts. I also argue that Bulow and Rogoff (1988)'s empirical evidence on buybacks is consistent with my models.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 10 (1991)
Issue (Month): 3 (September)
Pages: 330-348

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Handle: RePEc:eee:jimfin:v:10:y:1991:i:3:p:330-348

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Web page: http://www.elsevier.com/locate/inca/30443

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Cited by:
  1. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," 2006 Meeting Papers 565, Society for Economic Dynamics.
  2. Joshua Aizenman & Eduardo R. Borensztein, 1989. "Strategic Investment in a Debt Bargaining Framework," NBER Working Papers 3019, National Bureau of Economic Research, Inc.
  3. Jonathan P. Thomas, 2001. "Default Costs, Willingness to Pay and Sovereign Debt Buybacks," International Finance 0103002, EconWPA.
  4. Bhattacharya, S., 1991. "Sovereign debt, creditor-country governments, and multilateral institutions," Discussion Paper 1991-62, Tilburg University, Center for Economic Research.
  5. Marchesi, S., 2000. "Buybacks of Domestic Debt in Public Debt Management," The Warwick Economics Research Paper Series (TWERPS) 573, University of Warwick, Department of Economics.
  6. Balazs Szentes & Natalia Kovrijnykh, 2005. "A Theory of Debt Overhang and Buyback," 2005 Meeting Papers 447, Society for Economic Dynamics.

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