Leveraged Buybacks of Sovereign Debt: A Simple Model with an Application to Greece

14 Pages Posted: 24 May 2011 Last revised: 19 Feb 2013

See all articles by Angelo S. Baglioni

Angelo S. Baglioni

Catholic University of the Sacred Heart of Milan

Date Written: February 15, 2013

Abstract

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

Baglioni, Angelo, Leveraged Buybacks of Sovereign Debt: A Simple Model with an Application to Greece (February 15, 2013). Available at SSRN: https://ssrn.com/abstract=1850574 or http://dx.doi.org/10.2139/ssrn.1850574

Angelo Baglioni (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

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