Repurchase and condonation of external debt in a voluntary repudiation model

Abstract

Debt reduction is usually analyzed in models where default is involuntary and the gains from debt reduction derive from various disincentives linked to a large debt overhang. This paper uses a model in which default is voluntary and shows that debt reduction can be beneficial even in absence of those disincentives, by inducing debtors to renounce or postpone repudiation.