Sovereign Debt Standstills

Juan Carlos Hatchondo, Leonardo Martinez and Cesar Sosa Padilla
Authors registered in the RePEc Author Service: Cesar Sosa-Padilla

No 2020/290, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Standstill; Haircuts; COVID-19; Default; Debt Overhang; Voluntary Debt Exchange; WP; Pareto gain; debt level; default probability; welfare gain; bond price increase; long-term debt (search for similar items in EconPapers)
Pages: 27
Date: 2020-12-18
New Economics Papers: this item is included in nep-dge and nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Sovereign debt standstills (2021)
Working Paper: Sovereign Debt Standstills (2020)
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