Working Paper: CEPR ID: DP15832
Authors: Valentin Lang; David Mihalyi; Andrea Presbitero
Abstract: Can debt moratoria help countries weather negative shocks? We study the bond market effects of an official debt service suspension endorsed by the international community during the Covid-19 pandemic. Using daily data on sovereign bond spreads and synthetic control methods, we show that countries eligible for official debt relief experience a larger decline in borrowing costs compared to similar, ineligible countries. This decline is stronger for countries that receive a larger relief, suggesting that the effect works through liquidity provision. By contrast, the results do not support the concern that official debt relief could generate stigma on financial markets.
Keywords: debt relief; sovereign debt; developing countries; sovereign bond spreads; debt service suspension initiative
JEL Codes: F34; H63; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt Service Suspension Initiative (DSSI) (F34) | decline in sovereign bond spreads (H63) |
| eligibility for DSSI (H53) | decline in sovereign bond spreads (H63) |
| larger amount of debt relief (H63) | stronger decline in borrowing costs (E43) |
| no stigma effect (J79) | decline in sovereign bond spreads (H63) |