Leveraged buybacks of sovereign debt: a model and an application to Greece

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Abstract

The model presented in this paper shows that the outcome of a leveraged buyback of sovereign debt depends on the priority structure of the deal. If the institution lending the funds needed for the buyback is senior, the debtor country benefits from the deal: the government debt is reduced, implying a lower probability of default; at the same time, the deal makes the price of outstanding bonds go down, since their recovery rate declines. The opposite holds if the lending institution is junior. If the loan is under-priced, the implied subsidy is shared between the borrowing country and its bondholders, who can benefit from a price increase of their bonds. This is actually what happened with the buyback of Greek sovereign bonds in 2012, as it is shown in the empirical section. Those results do not depend on the share of country's endowment devoted to debt repayment, which instead plays a crucial role in shaping the outcome of unlevered buybacks.
Lingua originaleEnglish
pagine (da-a)87-103
Numero di pagine17
RivistaContemporary Economic Policy
VolumeVol.33
DOI
Stato di pubblicazionePubblicato - 2015

Keywords

  • sovereign debt, default, buyback

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