Debt Write-Downs and Debt-Equity Swaps in the Two Sector Model

26 Pages Posted: 18 Apr 2007 Last revised: 14 Jul 2010

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department

Date Written: September 1989

Abstract

"Debt overhang" models have motivated the possibility of Pareto-improving "market-based debt-reduction schemes" under an assumption of creditor seizure in bad states. These models usually reach the conclusion that while pure debt forgiveness is in the interest of debtor nations, debt repurchase programs are not. This paper introduces a "safe sector" into the debtor nation which is unexposed to seizure during default states. Two important results which emerge are that debt forgiveness is not necessarily in the interest of all debtors, and the potential for Pareto-improving debt-equity swaps is magnified.

Suggested Citation

Goldberg, Linda S. and Spiegel, Mark M., Debt Write-Downs and Debt-Equity Swaps in the Two Sector Model (September 1989). NBER Working Paper No. w3121. Available at SSRN: https://ssrn.com/abstract=980437

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

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National Bureau of Economic Research (NBER)

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Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department ( email )

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415-974-3184 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economics/economists/mspiegel.html

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