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Sensible debt buybacks for highly indebted countries

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  • Detragiache, Enrica

Abstract

Previous studies indicate that debt buybacks at market prices benefit lenders the most because the lack of a seniority structure in sovereign lending distorts secondary market prices upward. The author examines whether welfare-improving buybacks would arise at the"fair"price. If so, policy intervention is needed to remove the distortion. In a model of intertemporal consumption smoothing, buybacks at the fair price are desirable if the country experiences unusually heavy export earnings and if large reserve holdings tend to increase transfers to creditors in default states. Concerted agreements in which debt repurchases are linked to cuts in interest rates or new money requirements can make buybacks at the fair price viable, while preventing the free-rider problem among lenders.

Suggested Citation

  • Detragiache, Enrica, 1991. "Sensible debt buybacks for highly indebted countries," Policy Research Working Paper Series 621, The World Bank.
    • Handle: RePEc:wbk:wbrwps:621
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    References listed on IDEAS

    as
    1. 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.
    2. Diwan, Ishac & Claessens, Stijn, 1989. "An analysis of debt-reduction schemes initiated by debtor countries," Policy Research Working Paper Series 153, The World Bank.
    3. 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.
    4. Bulow, J. & Rogof, K., 1989. "Sovereign Debt Repurchases: No Cure For Overhang," Working papers 8903, Wisconsin Madison - Social Systems.
    5. Diwan, Ishac & Demirguc-Kunt, Asli, 1990. "The menu approach to developing country external debt : an analysis of commercial banks'choice behavior," Policy Research Working Paper Series 530, The World Bank.
    6. Acharya, Sankarshan & Diwan, Ishac, 1989. "Sovereign debt buybacks as a signal of creditworthiness," Policy Research Working Paper Series 318, The World Bank.
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    Cited by:

    1. Angelo Baglioni, 2015. "Leveraged Buybacks Of Sovereign Debt: A Model And An Application To Greece," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 87-103, January.

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