Sovereign Debt Buybacks: International and Domestic

Abstract

Since the 1980s many indebted countries have repurchased part of their debt usually at substantial discounts on the face value and these operations have appeared to be an attractive opportunity for highly indebted countries. Since 1990 onwards, some OECD countries have also begun to acquire experience in the use of debt repurchase instruments and some of them established regular bond repurchasing programmes. As far as we know, the literature on public debt management has not dealt with buybacks of domestic debt (except, for example, Coe et al., 2000), while they have been analysed quite deeply in the international debt framework. The main objectives of a domestic debt repurchase is to reduce both the risks and the costs of debt service. The risk that is considered is refinancing risk. Through buybacks the government can intervene in the market in order to smooth the maturities profile and so to avoid tensions in the secondary market. Then, buybacks could help reducing the costs of indebtedness for three reasons. In the first place they could be a way to increase the liquidity of the secondary market by switching from illiquid to liquid securities. A second way to reduce the costs of debt service could also derive from an opportunistic use of repurchases. The government could distinguish the more expensive bonds in the market and repurchase them issuing in their place cheaper securities. Finally, buybacks could be used to eliminate unfair risk premium since they can be used by a government in order to enhance its commitment to an announced policy.