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Cash/debt buy-backs and the insurance value of reserves

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  • Van Wijnbergen, Sweder

Abstract

Bulow and Rogoff showed in 1988 that auction based purchases of debt could not be an effective way to capture the secondary market discount, since the purchase pushes up the secondary market afterward. The author of this report points out another problem with cash debt buy backs - one that arises because terms of trade contingent instruments do not exist in international capital markets, and because of the differences in risk aversion that one may plausibly assume to exist between commercial creditors and the developing countries that are their debtor clients. Under such circumstances, secondary market prices fail to reflect the insurance value reserves have to debtors but not to creditors - since, after all, the secondary market reflects mostly intrabank transactions. As a result, the country buying back debt with reserves clearly ends up worse off, even if it succeeds in capturing the full secondary market discount prevailing before the buyback - because the buyback reduces the insurance possibilities open to the country.
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  • Van Wijnbergen, Sweder, 1990. "Cash/debt buy-backs and the insurance value of reserves," Journal of International Economics, Elsevier, vol. 29(1-2), pages 123-131, August.
    • Handle: RePEc:eee:inecon:v:29:y:1990:i:1-2:p:123-131
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    References listed on IDEAS

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    1. Helpman, Elhanan, 1989. "The Simple Analytics of Debt-Equity Swaps," American Economic Review, American Economic Association, vol. 79(3), pages 440-451, June.
    2. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kohlscheen, E. & O'Connell, S. A., 2007. "Trade Credit, International Reserves and Sovereign Debt," Economic Research Papers 269782, University of Warwick - Department of Economics.
    2. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    3. Aviral Kumar Tiwari & Phouphet Kyophilavong, 2017. "Exchange Rates and International Reserves in India," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 18(1), pages 76-93, March.
    4. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
    5. Kohlscheen, E. & O'Connell, S. A., 2006. "A Sovereign Debt Model with Trade Credit and Reserves," Economic Research Papers 269636, University of Warwick - Department of Economics.
    6. Bar-Ilan, Avner & Marion, Nancy P. & Perry, David, 2007. "Drift control of international reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3110-3137, September.
    7. Mendoza, Ronald U., 2004. "International reserve-holding in the developing world: self insurance in a crisis-prone era?," Emerging Markets Review, Elsevier, vol. 5(1), pages 61-82, March.
    8. Mr. Sunil Sharma & Woon Gyu Choi & Maria Strömqvist, 2007. "Capital Flows, Financial Integration, and International Reserve Holdings: The Recent Experience of Emerging Markets and Advanced Economies," IMF Working Papers 2007/151, International Monetary Fund.
    9. Patrick Artus, 2009. "À quoi ont servi les réserves de change très importantes ?," Revue d'Économie Financière, Programme National Persée, vol. 95(2), pages 259-274.
    10. Lekha Chakraborty, 2018. "Monetary Seigniorage in an Emerging Economy: Empirical Evidences," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(5), pages 135-144, May.
    11. Cabral, Celia C., 1996. "Evaluating debt repurchases What are the alternatives to investment?," Journal of International Economics, Elsevier, vol. 40(3-4), pages 477-494, May.

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