NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief

Kenneth A. Froot

NBER Working Paper No. 2675 (Also Reprint No. r1166)
Issued in April 1989
NBER Program(s):   ITI   IFM

We compare various forms of market-based debt relief with coordinated debt forgiveness on the part of creditors. These schemes lead to different allocations of resources and levels of debtor and creditor welfare, but all attempt to stimulate debtor investment through reductions in the level of debt. If investment-incentive effects are present, then investment in liquidity-constrained debtors will respond by enough to make a reduction in debt profitable, but not by enough to make the reduction in debt optimal. For these countries the optimal debt-relief package (from the creditors perspective) will include an infusion of new lending.

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Published: Froot, Ken. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," from International Economic Review, Vol. 30, No. 1, pp. 49-70,(February 1989).translated into Spanish in: Estudios Economicos, 4 (July 1989), pp 31-60.

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