Working Paper: NBER ID: w2637
Authors: Jeremy Bulow; Kenneth Rogoff
Abstract: The most widely proposed LDC debt plans are flawed by their failure to recognize the fundamental differences between corporate and sovereign debt. Consequently, many plans intended to help highly-indebted countries mainly aid their foreign creditors. This paper emphasizes the crucial distinction between marginal and average sovereign debt. This distinction provides the cornerstone for an understanding of debt buybacks, debt-equity swaps, and debt-for-debt swaps involving new classes of seniority. Highly indebted countries would benefit more from direct transfers than from the same resources spent on any of these financial engineering schemes.
Keywords: sovereign debt; debt restructuring; financial engineering; developing countries
JEL Codes: F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of sovereign debt contracts (H63) | inefficient outcomes (D61) |
| debt-equity swaps (G32) | inefficient outcomes for debtor countries (F34) |
| direct cash grant (H53) | better outcomes for HICs (I14) |
| debt repurchases at average prices (G32) | transfer of wealth from debtor to creditor (G51) |
| debt repurchases (G32) | value of creditors' claims (G33) |
| debt repurchases (G32) | inefficient outcomes for debtor countries (F34) |