Sensible debt buybacks for highly indebted countries

Enrica Detragiache ()

No 621, Policy Research Working Paper Series from The World Bank

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.

Keywords: Economic Theory&Research; Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Strategic Debt Management (search for similar items in EconPapers)
Date: 1991-03-31
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Citations: View citations in EconPapers (1)

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