Buy-backs, Debt-Equity Swaps, Asset Exchanges and Market Valuation of External Debt

Abstract

This paper develops a framework for evaluating a range of proposals to "buy-back" the external debt of developing countries. It is argued that the potential benefits of buy-backs and debt-equity swaps financed by a third party include a reduction in the contractual value of a country's debt, capital gains for creditors and a possible increase in domestic investment in the debtor country. These benefits are compared to the cost of the buy-back to the third party. Two important conclusions emerge from this analysis. First, the proposals that are able to increase the market price of debt also generate roughly the same increases in prices at which private investors will sell or exchange these debts. Second, the voluntary exchange of existing contracts for new contracts with different attributes, will reflect the post-exchange values of alternative contracts.