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Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief

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  • Kenneth A. Froot

Abstract

We compare various forms of market-based debt relief with coordinated debt forgiveness on the part of creditors. These schemes lead to different allocations of resources and levels of debtor and creditor welfare, but all attempt to stimulate debtor investment through reductions in the level of debt. If investment-incentive effects are present, then investment in liquidity-constrained debtors will respond by enough to make a reduction in debt profitable, but not by enough to make the reduction in debt optimal. For these countries the optimal debt-relief package (from the creditors perspective) will include an infusion of new lending.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2675.

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Date of creation: Aug 1988
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Publication status: published as Froot, Ken. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," from International Economic Review, Vol. 30, No. 1, pp. 49-70,(February 1989).translated into Spanish in: Estudios Economicos, 4 (July 1989), pp 31-60.
Handle: RePEc:nbr:nberwo:2675

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  1. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt Restructurings: Panacea or Pangloss?," NBER Working Papers 2637, National Bureau of Economic Research, Inc.
  2. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
  3. Rudiger Dornbusch, 1988. "Our LDC Debts," NBER Working Papers 2138, National Bureau of Economic Research, Inc.
  4. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  5. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
  6. Jeffrey Sachs, 1988. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Working Papers 2644, National Bureau of Economic Research, Inc.
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