NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Debt Write-Downs and Debt-Equity Swaps in the Two Sector Model

Linda S. Goldberg, Mark Spiegel

NBER Working Paper No. 3121*
Issued in August 1989
NBER Program(s):   ITI    IFM

"Debt overhang" models have motivated the possibility of Pareto-improving

"market-based debt-reduction schemes" under an assumption of

creditor seizure in bad states. These models usually reach the conclusion

that while pure debt forgiveness is in the interest of debtor nations, debt

repurchase programs are not.

This paper introduces a "safe sector" into the debtor nation which is

unexposed to seizure during default states. Two important results which

emerge are that debt forgiveness is not necessarily in the interest of all

debtors, and the potential for Pareto-improving debt-equity swaps is

magnified.

*Published: Journal of International Economics, vol. 33, (November 1992), p. 267-283

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