Leveraged Buybacks of Sovereign Debt: A Simple Model with an Application to Greece
14 Pages Posted: 24 May 2011 Last revised: 19 Feb 2013
Date Written: February 15, 2013
The model presented in this paper shows that the outcome of a leveraged buyback of sovereign debt depends on the seniority structure of the deal. If the institution lending the funds needed for the buyback is senior, the debtor country benefits from the deal and the market price of bonds declines. The opposite holds if the lending institution is junior. If the loan is under-priced, the implied subsidy is shared between the borrowing country and its bondholders, who can benefit from a price increase of their bonds. This is actually what happened with the buyback of Greek sovereign bonds in 2012, as it is shown in the empirical section. Those results do not depend on the share of country's wealth devoted to debt repayment, which instead plays a crucial role in shaping the outcome of unlevered buybacks.
Keywords: Sovereign debt, debt overhang, debt buyback, Greece
JEL Classification: F34, H63
Suggested Citation: Suggested Citation