The Strategy of Debt Buy-Backs: A Theoretical Analysis of the Competitive Case
  • 1 0000000404811396 Monetary Fund


This paper is concerned with analyzing the strategy of a debtor country repurchasing its debt at market prices. The main result, for the case in which unpaid interest is rolled over, is that a strategy of announced debt repurchases at market prices, under competitive conditions and rational expectations, will only allow the country to recover debt at par value whenever the market expects the remaining debt to be fully served at some time in the future. When debt holders are myopic with respect to future debt repurchases, a strategy can be devised by which all the “excess” debt is repurchased at a price equal, in present value, to that prevailing before the policy was announced.