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Working Paper

Debt Buybacks and Forgiveness in a Model with Voluntary Repudiation

페이스북
커버이미지
  • 저자 Peter B. Kenen
  • 발행일 1989/07/01
  • 시리즈 번호 8925
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요약 Recent papers by Krugman(1988), Bulow and Rogoff (1988,
1989), Froot (1989), and Williamson(1989) have examined the
benefits of debt forgiveness and debt buybacks under various
assumptions about the penalties that creditors impose when
debtors default and the disincentive effects of a large debt
overhang. In most of that literature, default occurs involuntarily,
when a stochastic shock produces a "bad state" in which debtors
cannot meet heir obligations. In this paper, by contrast, debtors
behave a sin Eaton and Gersobitz(1981). They decide to
repudiate their debts when the benefits exceed the costs,
including the costs of the penalties imposed by their creditors.

When debt forgiveness and debt buybacks are analyzed in
this context, the results are different from those obtained in
previous studies. Even when debt impairs economic efficiency in
the debtor country or interferes with the functioning of the
debtor's policies, debt reduction will not be mutually beneficial to
the debtor and its creditors unless it induces the debtor to
postpone or renounce the repudiation of its remaining debt.
When debt reduction does habe that effect, however, and the
stock of debt is sufficiently large, debt forgiveness can beneficial
to both parties, and a buyback at the price prevailing in the
secondary market can be beneficial too, even when the assets
used for the buyback yield a rate of return to the debtor higher
than the cost of servicing its debt.

The paper starts by modeling the debtor's behavior, turns
net to the creditors' situation, and then studies conditions in
which debt forgiveness and debt buybacks will be mutually
beneficial.

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