Sovereign Debt Repurchases: No Cure for Overhang

Abstract

Troubled debtor countries do not gain by repurchasing external bank debt at market discount, even if a buyback would stimulate investment by relieving debt overhang. The reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment. We show that open-market buybacks provide a benchmark for evaluating more complex negotiated buyback deals. By comparing any given deal with a hypothetical market buyback of the same size, one can derive upper and lower bounds on the gain to the country. We apply our model to the 1990 Mexican debt deal.