Working Paper: NBER ID: w28292
Authors: Juan C. Hatchondo; Leonardo Martinez; César Sosapadilla
Abstract: As a response to the economic difficulties triggered by the COVID-19 pandemic, the G20 implemented the Debt Service Suspension Initiative (DSSI), a standstill or sus- pension of official bilateral sovereign debt payments for some of the poorest countries. The G20 and others also called on private creditors to offer comparable terms but this did not materialize. We first show that a standard default model can account for the decline in sovereign spreads triggered by the DSSI. The model also accounts for the private creditors’ reluctance to participate in a debt standstill: Except when it avoids a default, a private-creditor standstill implies sizable capital losses for debt holders. Furthermore, while sovereign debt standstill proposals emphasize debt payment suspensions without write-offs on the face value of debt obligations, we find that complementing private-creditor standstills with write-offs could reduce debt holders’ losses and simultaneously increase sovereign welfare gains.
Keywords: Sovereign Debt; Debt Standstill; Welfare Gains; Creditors; Debt Writeoffs
JEL Codes: F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| combination of standstills with writeoffs (G33) | reduce creditor losses (G33) |
| combination of standstills with writeoffs (G33) | increase welfare gains for the sovereign (D69) |
| one-year standstill (Y20) | welfare gains for the sovereign (D69) |
| one-year standstill (Y20) | capital losses for creditors (G33) |
| standstills (D50) | higher default risk (G32) |
| higher default risk (G32) | increased expected deadweight losses from defaults (G33) |
| combination of standstills with writeoffs (G33) | Pareto improvement for both sovereign and creditors (F34) |