Profitable Buybacks in Sovereign Debt
Review of International Economics, Jan. 31, 1998
Posted: 2 Apr 1998
Since the 1982 debt crisis, several debtor countries have repurchased fractions of their debts. Bulow and Rogoff (1988, 1991) argue the buybacks benefit the banks but not the countries. Krugman (1989) argues the opposite. This paper provides an explanation of why buybacks benefit both, countries and banks. A lending environment with terms of trade shocks is considered. If a country defaults, banks impose a penalty on the country and incur some costs. We show that with a buyback, the country defaults on a smaller loan, if at all, and the economy saves part of these costs, if not all.
JEL Classification: F34
Suggested Citation: Suggested Citation