NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sovereign Debt Repurchases: No Cure for Overhang

Jeremy Bulow, Kenneth Rogoff

NBER Working Paper No. 2850
Issued in February 1989
NBER Program(s):   ME   ITI   IFM

We show, in a reasonably general model, that if a highly indebted country has good investment projects available to it, then it will not benefit from using any of its resources to buy back debt at market prices. Debt buybacks and debt-equity swaps only make sense for the country if these programs are heavily subsidized by creditors. This result holds for all buyback programs large and small, so long as they involve voluntary creditor participation and are not part of a larger deal including offsetting concessions from lenders. Our analysis therefore casts doubt on the popular argument that unilateral debt repurchases benefit HICs by relieving "debt overhang".

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Document Object Identifier (DOI): 10.3386/w2850

Published: Quarterly Journal of Economics, Vol. 106, pp. 1219-1235 (November 1991). citation courtesy of

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