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Evaluating debt repurchases: what are the alternative to investment?

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  • Costa-Cabral, Célia

Abstract

In 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)

Suggested Citation

  • Costa-Cabral, Célia, 1993. "Evaluating debt repurchases: what are the alternative to investment?," UC3M Working papers. Economics 2906, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:2906
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    References listed on IDEAS

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    1. Goldberg, Linda & Spiegel, Mark M., 1992. "Debt write-downs and debt--equity swaps in a two-sector model," Journal of International Economics, Elsevier, vol. 33(3-4), pages 267-283, November.
    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.
    3. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    4. Jeremy Bulow & Kenneth Rogoff, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1219-1235.
    5. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
    6. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
    7. 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.
    8. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    9. Sachs, J.D., 1989. "New Approaches To The Latin American Debt Crisis," Princeton Studies in International Economics 174, International Economics Section, Departement of Economics Princeton University,.
    10. 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.
    11. 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.
    12. Helpman, Elhanan, 1989. "The Simple Analytics of Debt-Equity Swaps," American Economic Review, American Economic Association, vol. 79(3), pages 440-451, June.
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    Cited by:

    1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077, Elsevier.

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    More about this item

    Keywords

    Debt Overhang;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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