Evaluating debt repurchases: what are the alternative to investment?
AbstractIn this paper a general model of debt repurchases is built which reconciles most of the points raised in the literature on debt buybacks. It is shown that results previously found in the literature can be obtained from this general model and are strongly dependant on assumptions made on its parameters. The condition that determines whether or not buybacks are an attractive solution from the point of the debtor nations is derived. Additionally it is shown that if there are other assets safer than investment, a debt buyback will always lead to an increase in investment and a reduction in the holdings of such other assets. This result holds independently of the source of the resources used for the buyback, unlike previous suggestions. With a buyback out of current resources, optimal reserves levels fall by more than what is used for the buyback, releasing extra resources for investment purposes, while current consumption does not fall. (JEL F34)
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/2906.
Date of creation:
Date of revision:
Contact details of provider:
Web page: http://www.uc3m.es
Debt Overhang; Debt Repurchases; Investment Incentives;
Other versions of this item:
- Cabral, Celia C., 1996. "Evaluating debt repurchases What are the alternatives to investment?," Journal of International Economics, Elsevier, vol. 40(3-4), pages 477-494, May.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-13 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeremy I. Bulow & Kenneth Rogoff, 1988.
"Sovereign Debt: Is To Forgive To Forget?,"
NBER Working Papers
2623, National Bureau of Economic Research, Inc.
- Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
- Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
- Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
- Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986.
"The pure theory of country risk,"
European Economic Review,
Elsevier, vol. 30(3), pages 481-513, June.
- Helpman, Elhanan, 1989.
"The Simple Analytics of Debt-Equity Swaps,"
American Economic Review,
American Economic Association, vol. 79(3), pages 440-51, June.
- Jeremy Bulow & Kenneth Rogoff, 1989.
"Sovereign Debt Repurchases: No Cure for Overhang,"
NBER Working Papers
2850, National Bureau of Economic Research, Inc.
- 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.
- Kenneth A. Froot, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," NBER Working Papers 2675, National Bureau of Economic Research, Inc.
- Rosenthal, Robert W., 1991. "On the incentives associated with sovereign debt," Journal of International Economics, Elsevier, vol. 30(1-2), pages 167-176, February.
- 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.
- Van Wijnbergen, Sweder, 1990. "Cash/debt buy-backs and the insurance value of reserves," Journal of International Economics, Elsevier, vol. 29(1-2), pages 123-131, August.
- Cline, William R, 1985. "Long-term Forecasts in International Economics," American Economic Review, American Economic Association, vol. 75(2), pages 120-26, May.
- Paul R. Krugman, 1989. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
- Schwartz, Eduardo S & Zurita, Salvador, 1992. " Sovereign Debt: Optimal Contract, Underinvestment, and Forgiveness," Journal of Finance, American Finance Association, vol. 47(3), pages 981-1004, July.
- Eaton, J. & Fernandez, R., 1995.
37, Boston University - Department of Economics.
- Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," Boston University - Institute for Economic Development 59, Boston University, Institute for Economic Development.
- Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Contact person).
If references are entirely missing, you can add them using this form.