Sovereign debt standstills

Juan Carlos Hatchondo, Leonardo Martinez and Cesar Sosa-Padilla
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Juan Carlos Hatchondo: University of Western Ontario

No 66, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

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: Debt relief Standstill; Haircuts COVID-19 Default Debt Overhang Voluntary Debt Exchange (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge and nep-opm
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https://rednie.eco.unc.edu.ar/files/DT/2021-66.pdf (application/pdf)

Related works:
Working Paper: Sovereign Debt Standstills (2020)
Working Paper: Sovereign Debt Standstills (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:66

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