Discussion Paper Details

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Title: Borrowing Costs after Sovereign Debt Relief

Author(s): Valentin Lang, David Mihalyi and Andrea Presbitero

Publication Date: February 2021

Keyword(s): Debt Relief, Debt Service Suspension Initiative, developing countries, Sovereign bond spreads and Sovereign debt

Programme Area(s): International Macroeconomics and Finance

Abstract: Can debt moratoria help countries weather negative shocks? We study the bond market effects of an official debt service suspension endorsed by the international community during the Covid-19 pandemic. Using daily data on sovereign bond spreads and synthetic control methods, we show that countries eligible for official debt relief experience a larger decline in borrowing costs compared to similar, ineligible countries. This decline is stronger for countries that receive a larger relief, suggesting that the effect works through liquidity provision. By contrast, the results do not support the concern that official debt relief could generate stigma on financial markets.

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Bibliographic Reference

Lang, V, Mihalyi, D and Presbitero, A. 2021. 'Borrowing Costs after Sovereign Debt Relief'. London, Centre for Economic Policy Research.