SENSIBLE BUYBACKS OF SOVEREIGN DEBT

Sovereign debt is not prioritized, and creditors share the costs of a default in proportion to their exposure. Equal-sharing insures that al l creditors cooperate in imposing default sanctions, but it leads to e xcessive borrowing. Countries that borrowed too much because of equal- sharing can gain from debt buybacks, even if there is no debt overhang . Sensible buybacks should be accompanied by either an interest rate r eduction or a new money provision, they should grant unsold debt senio rity over new loans, and they should assign future debt renegotiation to a third party.