Sovereign Debt Repurchases: No Cure for Overhang

Jeremy Bulow and Kenneth Rogoff

No 2850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show, in a reasonably general model, that if a highly indebted country has good investment projects available to it, then it will not benefit from using any of its resources to buy back debt at market prices. Debt buybacks and debt-equity swaps only make sense for the country if these programs are heavily subsidized by creditors. This result holds for all buyback programs large and small, so long as they involve voluntary creditor participation and are not part of a larger deal including offsetting concessions from lenders. Our analysis therefore casts doubt on the popular argument that unilateral debt repurchases benefit HICs by relieving "debt overhang".

Date: 1989-02
Note: ME ITI IFM
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Published as Quarterly Journal of Economics, Vol. 106, pp. 1219-1235 (November 1991).

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