Sovereign Debt Repurchases: No Cure for Overhang

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. In a buyback, creditors reap more than 100 percent of any investment efficiency gains. We show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals. By comparing any given debt reduction 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. 

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