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Van Wijnbergen, S. (1990). Cash/debt buy-backs and the insurance value of reserves Journal of International Economics, 29(1-2):123--131.

  • Journal
    Journal of International Economics
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The absence of terms of trade contingent instruments in international capital markets, combined with differences in risk aversion between commercial creditors and LDC borrowers, has important consequences for the welfare effects of cash/debt buy-backs. In such circumstances secondary market prices fail to reflect the insurance value reserves have to debtors but not to creditors. Therefore, the country buying back debt with reserves ends up unambiguously worse off even if it succeeds in capturing the full secondary market discount prevailing before the buy-back.