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

  • Froot, Kenneth A

The author compares forms of market-based debt relief with coordinated debt forgiveness on the part of creditors. Debtors benefit from these schemes to the extent that expected payments fall, but lose to the extent that they sacrifice current resources. Creditors' benefit when the buyback resources are "additional," and when debt reduction creates greater incentives for full repayment. The source of buyback resources is a critical determinant in assessing potential welfare gains. For liquidity-constrained debtors, debt reduction is not optimal for debtors or creditors. For these countries, the optimal debt-relief package (from the creditors' perspective) will include an infusion of new lending. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 30 (1989)
Issue (Month): 1 (February)
Pages: 49-70

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Handle: RePEc:ier:iecrev:v:30:y:1989:i:1:p:49-70
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  1. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  2. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  3. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt Restructurings: Panacea or Pangloss?," NBER Working Papers 2637, National Bureau of Economic Research, Inc.
  4. Rudiger Dornbusch, 1988. "Our LDC Debts," NBER Working Papers 2138, National Bureau of Economic Research, Inc.
    • Rudiger Dornbusch & Thomas S. Johnson & Anne O. Krueger, 1988. "Our LDC Debts," NBER Chapters, in: The United States in the World Economy, pages 161-214 National Bureau of Economic Research, Inc.
  5. Jeffrey Sachs, 1988. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Working Papers 2644, National Bureau of Economic Research, Inc.
  6. 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.
  7. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
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