Working Paper: CEPR ID: DP18415
Authors: Danny Cassimon; Dennis Essers; Andrea Presbitero
Abstract: Developing countries have recently proved reluctant to participate in sovereign debt moratoria and debt relief initiatives. We argue that debtors' (non-)participation decisions can be understood through the lens of real options. Eligible countries compare the net benefits of participating in a debt relief initiative now with the value of waiting to potentially execute their participation option later, when they may have more information on the benefits and costs. We corroborate the real option framing with anecdotal evidence and through a survival analysis that exploits cross-country and time variation in the requests to participate in the Debt Service Suspension Initiative (DSSI), which provided temporary debt moratoria during the COVID-19 pandemic. Structured along the policy levers suggested by the real option framework, we discuss a number of ways in which participation in debt relief initiatives can be made more attractive to debtor countries.
Keywords: Sovereign Debt; Real Options; Survival Analysis
JEL Codes: H63; F34; F55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debtor countries' nonparticipation (F34) | net benefits of immediate participation (J32) |
| Higher expected debt service savings (G32) | likelihood to request participation in DSSI (D91) |
| Greater risk of debt distress (F34) | likelihood to request participation in DSSI (D91) |
| Significant exposure to international bondholders (F34) | likelihood to delay requests for DSSI (C69) |
| Higher credit ratings (G21) | likelihood to delay requests for DSSI (C69) |
| Above-median debt service savings (F34) | quicker requests for DSSI support (C87) |
| Active IMF arrangements (F33) | quicker requests for DSSI support (C87) |
| Larger shares of debt service owed to bondholders (H74) | delayed requests for DSSI (C69) |