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Debt Write-Downs and Debt-Equity Swaps in the Two Sector Model

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  • Linda S. Goldberg
  • Mark Spiegel

Abstract

"Debt overhang" models have motivated the possibility of Pareto-improving "market-based debt-reduction schemes" under an assumption of creditor seizure in bad states. These models usually reach the conclusion that while pure debt forgiveness is in the interest of debtor nations, debt repurchase programs are not. This paper introduces a "safe sector" into the debtor nation which is unexposed to seizure during default states. Two important results which emerge are that debt forgiveness is not necessarily in the interest of all debtors, and the potential for Pareto-improving debt-equity swaps is magnified.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3121.

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Date of creation: Aug 1989
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Publication status: published as Journal of International Economics, vol. 33, (November 1992), p. 267-283
Handle: RePEc:nbr:nberwo:3121

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  1. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 555-606.
  2. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  3. Michael P. Dooley, 1988. "Self-Financed Buy-Backs and Asset Exchanges," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 714-722, December.
  4. 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.
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