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Sovereign Debt Repurchases: No Cure for Overhang

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  • Jeremy Bulow
  • Kenneth Rogoff

Abstract

We show, in a reasonably general model, that if a highly indebted country has good investment projects available to it, then it will not benefit from using any of its resources to buy back debt at market prices. Debt buybacks and debt-equity swaps only make sense for the country if these programs are heavily subsidized by creditors. This result holds for all buyback programs large and small, so long as they involve voluntary creditor participation and are not part of a larger deal including offsetting concessions from lenders. Our analysis therefore casts doubt on the popular argument that unilateral debt repurchases benefit HICs by relieving "debt overhang".

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2850.

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Date of creation: Feb 1989
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Publication status: published as Quarterly Journal of Economics, Vol. 106, pp. 1219-1235 (November 1991).
Handle: RePEc:nbr:nberwo:2850

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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. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
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