Sovereign Debt Standstills / Juan C. Hatchondo, Leonardo Martinez, César Sosa-Padilla.

Format:

Book

Author/Creator:

Hatchondo, Juan C.

Contributor:

Martinez, Leonardo.

Sosa-Padilla, César.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28292.

NBER working paper series no. w28292

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

As a response to economic crises triggered by COVID-19, sovereign debt standstill proposals emphasize debt payment suspensions without write-offs 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. We show that complementing the standstill with write-offs could reduce creditors' losses and simultaneously increase welfare gains. Our results cast doubts on the emphasis on standstills without a write-off.

Notes:

Print version record

December 2020.