Sovereign Debt Standstills

By Juan Carlos Hatchondo, Leonardo Martinez, Cesar Sosa Padilla

December 18, 2020

Preview Citation

Format: Chicago

Juan Carlos Hatchondo, Leonardo Martinez, and Cesar Sosa Padilla. Sovereign Debt Standstills, (USA: International Monetary Fund, 2020) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

As a response to economic crises triggered by COVID-19, sovereign debt standstill proposals emphasize debt payment suspensions without haircuts on the face value of debt obligations. We quantify the effects of standstills using a standard default model. We find that a one-year standstill generates welfare gains for the sovereign equivalent to a permanent consumption increase of between 0.1% and 0.3%, depending on the initial shock. However, except when it avoids a default, the standstill also implies capital losses for creditors of between 9% and 27%, which is consistent with their reluctance to participate in these operations and indicates that this reluctance would persist even without a free-riding or holdout problem. Standstills also generate a form of “debt overhang” and thus the opportunity for a “voluntary debt exchange”: complementing the standstill with haircuts could reduce creditors’ losses and simultaneously increase welfare gains. Our results cast doubts on the emphasis on standstills without haircuts.

Subject: Asset prices, Debt burden, Debt relief, Personal income, Securities markets

Keywords: Bond price increase, COVID-19, Debt level, Debt Overhang, Default, Default probability, Haircuts, Long-term debt, Pareto gain, Standstill, Voluntary Debt Exchange, Welfare gain, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/290
Stock No:

WPIEA2020290
ISBN:

9781513564531
ISSN:

1018-5941

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