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Debt Buybacks Signal Sovereign Countries' Creditworthiness: Theory and Tests

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  • Acharya, Sankarshan
  • Diwan, Ishac
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    Abstract

    The authors show that debt buybacks could convey valuable information about indebted countries' willingness to invest and increase debt repayment when creditors are less informed than debtors. In an informational equilibrium, unwilling countries do not repurchase a part of their debt, but willing countries do; and creditors increase debt repayments by offering reliefs only to those countries that repurchase. Data show that creditors systematically grant debt reliefs only to countries with buyback programs; and a country's secondary market debt price is higher when it has a buyback program than if it does not. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 34 (1993)
    Issue (Month): 4 (November)
    Pages: 795-817

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    Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:795-817

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    Cited by:
    1. Rune Hagen, 2012. "Certified or branded?," The Review of International Organizations, Springer, vol. 7(2), pages 203-230, June.
    2. Joshua Aizenman & Jorge Fernández-Ruiz, 2006. "Signaling Credibility --- Choosing Optimal Debt and International Reserves," NBER Working Papers 12407, National Bureau of Economic Research, Inc.
    3. 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.

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