DP15832 Borrowing Costs after Sovereign Debt Relief

Author(s): Valentin Lang, David Mihalyi, Andrea Presbitero
Publication Date: February 2021
Keyword(s): Debt Relief, Debt Service Suspension Initiative, developing countries, Sovereign bond spreads, Sovereign debt
JEL(s): F34, H63, O23
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15832

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.