Debt buy–back operations and growth: Evidence from HIPCs

Governments with unsustainable debt burden have relatively high potential to face the situations such as insolvency, default and/or debt crises. Such undesirable situations may make it necessary to restructure the government debt. It is a common situation in practice that the said debt restructuring transactions are in the nature of serial debt restructurings by being more than one and occurring at the same time. In cases where the government debt restructuring operations are realized in series as mentioned, the last of these restructuring processes is called final restructuring in the literature. Thanks to the restructuring of government debt, the credit ratings of debtor countries can be increased, their access to financial markets can be restored, the debt burden of countries can be alleviated and/or borrowing costs can be improved, thus the financial sustainability of debtor countries can be reestablished, and ultimately these countries will be able to increase their borrowing and economic growth compared to the period before restructuring and, become more stable in terms of growth and thus can show a high performance. All these developments are expected to take place especially after the final restructurings. As a matter of fact, since 1975, a total of 124 countries have experienced various debt restructuring practices for these and similar purposes. However, the execution of government debt restructuring transactions in the form of debt buy-backs has the potential to adversely affect the macroeconomic dynamics of debtor countries. In general, this study aims to examine and analyze the possible short and medium-term effects of government debt restructuring on the growth performance of debtor countries with positive and normative perspectives. However, the study focuses on how the growth performances of debtor countries are affected if government debt restructuring is carried out in the form of debt buy-back practices. This possible interaction is examined in the study with positive and normative approaches. In this framework, Pooled Ordinary Least Squares (OLS) panel regression model was applied in order to empirically analyze the aforementioned possible relationship on the basis of the positive approach. Within the framework of the normative approach, the general anatomy and application differences of the related debt restructuring practices and the findings of the empirical analyzes carried out within the study were analyzed comparatively and policy recommendations were made on the subject. The mentioned issues have been examined in the study specifically for Heavily Indebted Poor Countries (HIPCs). As a result of the study, it has been determined that the execution of government debt restructuring transactions in the form of debt repurchase agreements negatively affects the growth performance of debtor countries in the short and medium term. Keywords: Sovereign Debt, Sovereign Debt Structuring, Debt Buy-back, Growth, HIPCs