Default Costs, Willingness to Pay and Sovereign Debt Buybacks

Jonathan Thomas

International Finance from University Library of Munich, Germany

Abstract: The arguments put forward by Bulow and Rogoff (1988, 1991) against sovereign debt buybacks are re-examined in a willingness-to-pay framework. This paper argues that the Bulow-Rogoff framework treats default by a debtor as an event with no dead-weight loss, and, as such, underestimates the potential gains from a buyback. The willingness-to- pay framework allows dead-weight costs of default to be introduced in a consistent and simple fashion into the buybacks calculus. Two versions of this framework are considered. First, a model in which the default costs induce an all-or-nothing default decision is analysed. In this case, an ambiguous result is derived in which the variability of the debtor’s income determines whether (small) buybacks are beneficial to the debtor, even though expected total transfers to the creditor increase, consistent with Bulow-Rogoff. In a second version, default costs are modelled so as to induce at most a partial default. This model corresponds most closely, in terms of the repayment behaviour of the sovereign debtor, to the models used by Bulow and Rogoff. It is shown that small buybacks are always beneficial to the debtor in this case. The second version is extended to include an investment opportunity. Only if the country has sufficiently scarce resources when the investment can be made, will a buyback be harmful to the interests of the debtor.

Keywords: Sovereign; Debt; Buybacks; Sanctions; Willingness; to; Pay (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2001-03-08
Note: Type of Document - PDF; prepared on IBM-PC; pages: 22 ; figures: none. 22 pages, PDF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0103/0103002.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0103002

Access Statistics for this paper

More papers in International Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).