Working Paper: NBER ID: w2850
Authors: Jeremy Bulow; Kenneth Rogoff
Abstract: 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".
Keywords: sovereign debt; debt buybacks; investment; highly indebted 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 |
|---|---|
| Investment opportunities (G11) | debt buybacks (H63) |
| debt buybacks (H63) | investment (G31) |
| debt buybacks (subsidized) (H63) | investment (G31) |
| (x + y) (C29) | investment (G31) |
| marginal debt retired (H69) | average debt price (G19) |
| buyback tax (H23) | potential benefits of increased investment (G31) |