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Strategic Buybacks of Sovereign Debt

Author

Listed:
  • Jacek Prokop

    (Department of Economics II, Warsaw School of Economics, 02-554 Warsaw, Poland)

  • Ruqu Wang

    (Department of Economics, Queen¡¯s University, Kingston, Ontario K7L 3N6, Canada)

Abstract

We consider a transaction costs model of sovereign debt buybacks in this paper. We show that both secret and publicly known buybacks are profitable for the debtor country. Furthermore, the government of the debtor country would like to spend all of its initial endowment to buy back its debt as soon as possible. When the initial endowment of the government is publicly known, the equilibrium outcome of the secret buyback model is the same as in the public buyback model. However, the equilibrium outcomes are different when the initial endowment is private information of the government. Under reasonable conditions, the secondary market price under publicly observable buybacks is lower than the price under secret buybacks. Therefore the government prefers the former over the latter when the initial endowment is not commonly known.

Suggested Citation

  • Jacek Prokop & Ruqu Wang, 2012. "Strategic Buybacks of Sovereign Debt," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 7(1), pages 1-21, March.
    • Handle: RePEc:fec:journl:v:7:y:2012:i:1:p:1-21
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-001-012-0001-9
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    References listed on IDEAS

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    1. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 46, April.
    2. Jeremy Bulow & Kenneth Rogoff, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1219-1235.
    3. Cohen, Daniel & Verdier, Thierry, 1995. "'Secret' buy-backs of LDC debt," Journal of International Economics, Elsevier, vol. 39(3-4), pages 317-334, November.
    4. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
    5. Rotemberg, Julio J., 1991. "Sovereign debt buybacks can lower bargaining costs," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 330-348, September.
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    Cited by:

    1. Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
    2. Angelo Baglioni, 2015. "Leveraged Buybacks Of Sovereign Debt: A Model And An Application To Greece," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 87-103, January.

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    More about this item

    Keywords

    debt buybacks; secret buybacks; sovereign debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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