Sovereign Debt Repurchases: No Cure for Overhang
Troubled debtor countries do not gain by repurchasing external bank debt at market discount, even if a buyback would stimulate investment by relieving debt overhang. The reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment. The authors show that open-market buybacks provide a benchmark for evaluating more complex negotiated buyback deals. By comparing any given deal with a hypothetical market buyback of the same size, one can derive upper and lower bounds on the gain to the country. The authors apply their model to the 1990 Mexican debt deal. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 106 (1991)
Issue (Month): 4 (November)
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References listed on IDEAS
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- 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, 1988. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," NBER Working Papers 2675, National Bureau of Economic Research, Inc.
- 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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