New CEPR Policy Insight - Born Out of Necessity: A Debt Standstill for COVID-19
The Covid-19 crisis has led to a sudden collapse in capital flows to emerging and developing countries, who now face problems servicing their external debts while addressing the growing economic strain of the pandemic. Immediate action is needed to prevent disorderly defaults, litigations, and a collapse in the international debt market.
In this CEPR Policy Insight, ‘Born Out of Necessity: A Debt Standstill for COVID-19’, CEPR President Beatrice Weder di Mauro, CEPR Vice President Ugo Panizza, Patrick Bolton, Lee Buchheit, Mitu Gulati, Pierre-Olivier Gourinchas and Chang-Tai Hsieh explain why low- and middle-income countries are particularly vulnerable, discuss what is at stake for the world economy, and present a mechanism to implement a debt standstill which would free significant resources to cover some of the more immediate costs of the COVID-19 crisis.
The authors propose that institutions such as the World Bank or other multilateral development banks create a central credit facility (CCF) allowing countries requesting temporary relief to deposit their stayed interest payments to official and private creditors for use for emergency funding to fight the pandemic.
"A 12-month debt standstill from both bilateral and private sector creditors would provide around $800 billion in resources for emerging and developing countries (excluding China), representing 4.7% of their annual income. All funding from this emergency facility and associated deferred principal payments would eventually be paid back to creditors"
The economic impact of the Covid-19 pandemic will affect low- and middle-income countries in unique ways. The proposed debt standstill mechanism detailed in this CEPR Policy Insight will provide much needed debt relief for those countries most vulnerable to the costs of the crisis.
"It is pointless and unfair for the G20 to provide debt relief for developing countries if the freed resources flow immediately into the hands of hedge funds in Greenwich, Connecticut"
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