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Sovereign Debt Standstills

Juan C. Hatchondo, Leonardo Martinez and Cesar Sosa-Padilla ()

No 28292, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-opm
Note: EFG IFM ME
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Working Paper: Sovereign debt standstills (2021) Downloads
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