Sovereign Debt Standstills
IMF Working Papers, December 18, 2020
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Bibliographic details
- Authors: Juan Carlos Hatchondo, Leonardo Martinez, Cesar Sosa Padilla
- Published: December 18, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513564531.001
Key findings
- 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.
- Except when it avoids a default, the standstill implies capital losses for creditors of between 9% and 27%.
- Standstills generate a form of “debt overhang” and thus create the opportunity for a “voluntary debt exchange”.
- Complementing the standstill with haircuts could reduce creditors’ losses and simultaneously increase welfare gains.
- The results cast doubts on the emphasis on standstills without haircuts.
Quantitative outcomes and model context
- Welfare gain for sovereign from a one-year standstill: between 0.1% and 0.3% (permanent consumption-equivalent increase).
- Creditors’ capital losses from a standstill (except when default is avoided): between 9% and 27%.
- Analysis conducted using a standard default model to quantify effects of standstills.
Implications for creditors and participation
- The magnitude of creditors’ losses (9%–27%) is consistent with reluctance to participate in standstills.
- This reluctance would persist even without a free-riding or holdout problem, given the model-implied capital losses.
- Voluntary debt exchanges that include haircuts can mitigate creditors’ losses and improve sovereign welfare outcomes.
Policy considerations
- Standstills without haircuts deliver limited sovereign welfare gains and substantial creditor losses in many scenarios; policymakers should not emphasize standstills alone.
- Policymakers considering standstills should evaluate complementary measures (for example, voluntary debt exchanges with haircuts) to balance sovereign welfare improvements and creditor losses.
- Assess whether a standstill can avoid default; only in such cases do creditor losses potentially not materialize.
Juan Carlos Hatchondo, Leonardo Martinez, and Cesar Sosa Padilla. "Sovereign Debt Standstills", IMF Working Papers 2020, 290 (2020), December 18, 2020, https://doi.org/10.5089/9781513564531.001
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