Take the role of a macroeconomic consultant to a national government with an outstanding debt burden that requires manag

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Take the role of a macroeconomic consultant to a national
government with an outstanding
debt burden that requires management. Suppose the “Debt Laffer”
Curve takes a pecu-
liar kinked shape: the market value V of outstanding debt grows at
a rate of 1:1 with the
face value D of the debt up to a certain debt level of D and that
the market value of debt
subsequently stays constant.
Suppose the country’s outstanding face value of debt is currently
$1 billion US dollars
and that one unit of the debt currently trades at 30 cents on the
dollar.
• What is the current market value V of outstanding debt (in
$)?
• Propose a complete strategy for the debtor country to reduce its
debt burden V to
the minimally possible amount, by optimally combining debt
forgiveness and debt
buybacks, under the condition that the debtor country is no worse
off at any step in
terms of net resource outflows compared to its preceding debt
position. For each
proposed step of your strategy
– remark whether you propose forgiveness or buyback,
– state the market value v of one unit of debt at the start and at
the end of the step,
and
– state the outstanding face value D at the start and at the end of
the step
• Can the country fully eradicate its debt? Why or why not?
• Would the strategy work for a typical Debt Laffer Curve that is
smooth (no kinks)?