Profitable Buybacks in Sovereign Debt

Review of International Economics, Jan. 31, 1998

Posted: 2 Apr 1998

Abstract

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

Farazli, Jeannine M., Profitable Buybacks in Sovereign Debt. Review of International Economics, Jan. 31, 1998. Available at SSRN: https://ssrn.com/abstract=73067

Jeannine M. Farazli (Contact Author)

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-5860 (Phone)
403-282-5262 (Fax)

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