Profitable Buybacks in Sovereign Debt

Jeannine M Farazli

Review of International Economics, 1998, vol. 6, issue 4, 649-59

Abstract: Since the 1982 debt crisis, several debtor countries have repurchased fractions of their debts. Bulow and Rogoff have argued that these buybacks benefit the banks but not the countries. Krugman argues the opposite. This paper provides an explanation of why buybacks benefit both countries and banks. A lending environment with terms-of-trade shocks is considered. If a country defaults, banks impose a penalty on the country and incur some costs. It is shown that with a buyback, the country defaults on a smaller loan, if at all, and the economy saves part of these costs, if not all. Copyright 1998 by Blackwell Publishing Ltd.

Date: 1998
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