Debt Write-Downs and Debt-Equity Swaps in the Two Sector Model
Linda S. Goldberg
"Debt overhang" models have motivated the possibility of Pareto-improving
"market-based debt-reduction schemes" under an assumption of
creditor seizure in bad states. These models usually reach the conclusion
that while pure debt forgiveness is in the interest of debtor nations, debt
repurchase programs are not.
This paper introduces a "safe sector" into the debtor nation which is
unexposed to seizure during default states. Two important results which
emerge are that debt forgiveness is not necessarily in the interest of all
debtors, and the potential for Pareto-improving debt-equity swaps is
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