What are the possible issues on the Secondary Market?

The secondary Market is not an easy market. Some issues might arise such as “buybacks” and problems involving the conduct of the sovereign.

The existence of a secondary market in a sovereign’s debt obligations could trouble the creditors if the sovereign has the legal capacity or the funds, required to benefit from the discounts on its own paper prevailing in this secondary market.

and thus realise the benefit of the discount for itself. (1)

There are two reasons why a sovereign borrower could not legally repurchase its own debt:

- the mandatory prepayment restriction and

- the sharing clause.

This clause precludes the borrower from paying one item of indebtedness ahead of the others. (2)

This clause prevents the borrower from making disproportionate payments to one lender without paying the others. (3)

These clauses were never intended to safeguard against a sovereign’s attempting to benefit from the discounts on its own paper prevailing in that market.

Actions to raise the value of one’s paper:

- a sovereign can institute a debt/equity conversion programme (this could add a value (5-10cents) to the secondary market price of one’s paper)

Actions or events to diminish the price of one’s paper:

- promulgation of a moratorium on interest payments;

- suffer a major earthquake, drought or typhoon and the price will come down;

A sovereign could influence the market and could have its benefits in the form of increasing secondary market discounts.

The money for a buyback was the money that would otherwise be allocated to pay interest on the very debt that was targeted for repurchase. (5)