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Strategic Buybacks of Sovereign Debt

Jacek Prokop () and Ruqu Wang ()
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Ruqu Wang: Department of Economics, Queen¡¯s University, Kingston, Ontario K7L 3N6, Canada

Frontiers of Economics in China, 2012, vol. 7, issue 1, 1-21

Abstract: We consider a transaction costs model of sovereign debt buybacks in this paper. We show that both secret and publicly known buybacks are profitable for the debtor country. Furthermore, the government of the debtor country would like to spend all of its initial endowment to buy back its debt as soon as possible. When the initial endowment of the government is publicly known, the equilibrium outcome of the secret buyback model is the same as in the public buyback model. However, the equilibrium outcomes are different when the initial endowment is private information of the government. Under reasonable conditions, the secondary market price under publicly observable buybacks is lower than the price under secret buybacks. Therefore the government prefers the former over the latter when the initial endowment is not commonly known.

Keywords: debt buybacks; secret buybacks; sovereign debt (search for similar items in EconPapers)
JEL-codes: F34 G15 C72 (search for similar items in EconPapers)
Date: 2012
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http://journal.hep.com.cn/fec/EN/10.3868/s060-001-012-0001-9 (application/pdf)

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Working Paper: Strategic Buybacks of Sovereign Debt (1997) Downloads
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