IT IS USEFUL to warn, as Jeremy Bulow and Kenneth Rogoff do in another paper in this issue, that “debt reduction” is not necessarily a panacea for heavily indebted countries. Many of the new schemes for debt reduction, such as exit bonds, buybacks, and debt-equity swaps, can be a poor deal for a debtor country, even when it is thereby enabled to retire debt at a discount relative to face value. It may make little sense for a debtor country to nibble away at its debt in a series of piecemeal transactions in which a bit of debt is repurchased at a discount in each transaction. Debt-equity swap programs, and other “voluntary debt reduction” schemes in the U.S. Treasury’s so-called menu of options, almost always have this piecemeal character. It is no accident that Citicorp, rather than the debtor countries, is the world’s leading advocate of debt-equity swaps. An awareness of the dangers of piecemeal debt relief, however, should not be generalized into the proposition that retiring deeply discounted debt is invariably bad for the debtor country. Buybacks can be a useful and even important device for an overly indebted country, when they are part of a comprehensive arrangement for the debtor country, as they were in the recent case in Bolivia. In this paper, I will first explain why comprehensive debt reduction mechanisms, including buybacks, can be highly desirable. I will then suggest why these mechanisms have not so far played a significant role in the debt strategy of the United States and the multilateral lending institutions. Finally, I will show why the Bolivian case is a successful example of a comprehensive strategy of debt reduction, one that has been to the benefit of Bolivia and its creditors as well.
