The Buyback Boondoggle

ACROSS Latin America today, countries are experimenting with marketbased debt reduction to ease their massive foreign debt burdens. Brazil expects to swap $8 billion of its debt for equity investments during 1988. During the first nine months of 1988, Chile swapped $1.42 billion of its bank debt for equity, and plans to repurchase more debt using reserves. Mexico, which converted roughly $2.5 billion worth of debt during 1986 and 1987, tried unsuccessfully to swap $10 billion in new senior bonds for $20 billion in bank debt in February 1988; a revised plan is said to be in the offing. Many smaller debtor countries are also attempting to restructure their foreign debts. Bolivia repurchased 46 percent of its bank debt last March, and there is now talk of Costa Rica engaging in a buyback.' The danger in the new trend is that when highly indebted countries retire their deeply discounted debt, either through buybacks or debtequity swaps, they may simply be using their scarce resources to subsidize their creditors. Such programs might be valuable as components of efficiency-enhancing larger deals between debtors and creditors. However, highly indebted countries do not benefit if they repurchase debt unilaterally, without receiving concessions. In some instances