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A Primeron Sovereign Debt Buybacks and Swaps

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  • Magdalena Polan
  • Parmeshwar Ramlogan
  • Carlos I. Medeiros
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    Abstract

    This paper sets forth some basic principles that could help debt managers in emerging market and other countries to plan and implement sovereign debt buyback and swap operations. It discusses the macroeconomic context in which buybacks and swaps are undertaken, the objectives of buybacks and swaps, the analytical framework for deciding whether to undertake a particular buyback or swap operation and for selecting among alternative operations, and some key issues in the determination of the strategy for executing buybacks and swaps. The focus is on developing the analytical framework for evaluating sovereign debt buyback and swap operations, since very little work has been done in this area. In this regard, the paper presents a step-wise decision-making procedure, in which discounted cash flow analysis and the use of strategic benchmarks for the debt play central roles.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/58.

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    Length: 49
    Date of creation: 01 Mar 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/58

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    Related research

    Keywords: Sovereign debt; Debt management; Debt buyback arrangements; bond; capital market; bonds; capital markets; domestic capital; debt service; international capital markets; domestic capital markets; old bond; cash flows; capital market development; international capital; callable bond; debt service payments; present value; discount rate; debt stock; derivative; bond price; access to international capital; bondholders; bond market; brady bonds; domestic capital market; bond issues; domestic bond; domestic-currency; old bonds; domestic bond market; domestic bonds; bond indenture; access to international capital markets; corporate bond; net present value; future cash flows; interest rate risk; discounting; bond portfolio; debt swaps; market bond; foreign bonds; access to capital markets; cash flow; bond markets; benchmark bond; bond prices; call options; individual bonds; bond covenants; bond issue; credit rating; internal rate of return; bond yield; sovereign bond; benchmark bonds; hedge; derivative markets; partial derivative; capital budgeting; international reserves; domestic bond markets; government bonds; outstanding bonds; coupon bond; discount rates; discounted cash flows; bullet bond; bond market development; domestic bond market development; bullet maturity bond; zero coupon bonds; call premium; income bonds; put options; derivative instruments; financial system; capital market infrastructure; derivative contracts; callable bonds; liquidity crisis; demand for bonds; capital gains tax; commercial bank loans; domestic borrowing; local currency bond markets; mature capital markets; foreign bond; brady bond; bond rate; emerging market bond; financial assets; bond yield curve; government securities; fixed income bonds; bond maturity; local capital market; local capital markets; domestic interest rates; illiquid capital markets; liquid capital; global bonds; secondary bond market; coupon bonds; debt instrument; stock of government debt; issuance of bonds; small bond issues; supply of bonds; deposit rate; capital market access; interest rate swaps; financial innovation; local currency bond; international finance; zero coupon bond; capital gains; financial contracts; rate bond; discounted cash flow; commodity prices; bondholder; bond spreads; currency risk; financial stability; discounted cash flow analysis;

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    References

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    1. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
    2. Jonathan P. Thomas, 2001. "Default Costs, Willingness to Pay and Sovereign Debt Buybacks," International Finance 0103002, EconWPA.
    3. Bulow, Jeremy & Rogoff, Kenneth, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1219-35, November.
    4. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    5. Graeme Wheeler, 2004. "Sound Practice in Government Debt Management," World Bank Publications, The World Bank, number 15017, October.
    6. Michael G. Papaioannou, 2006. "A Primer for Risk Measurement of Bonded Debt From the Perspective of a Sovereign Debt Manager," IMF Working Papers 06/195, International Monetary Fund.
    7. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
    8. Andrew Ang & Jun Liu, 2003. "How to Discount Cashflows with Time-Varying Expected Returns," NBER Working Papers 10042, National Bureau of Economic Research, Inc.
    9. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
    10. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," NBER Working Papers 12552, National Bureau of Economic Research, Inc.
    11. Oswald D. Bowlin, 1966. "The Refunding Decision: Another Special Case In Capital Budgeting," Journal of Finance, American Finance Association, vol. 21(1), pages 55-68, 03.
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    Cited by:
    1. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers 09/29, International Monetary Fund.
    2. Udaibir S. Das & Michael G. Papaioannou & Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," IMF Working Papers 10/10, International Monetary Fund.

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