Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach
IMF Working Papers, September 8, 2023
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- Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach
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Bibliographic details
- Authors: Danny Cassimon, Dennis Essers, Andrea F Presbitero
- Published: September 8, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400248504.001
Summary and central argument
- Developing countries have recently proved reluctant to participate in sovereign debt moratoria and debt relief initiatives.
- The paper argues that debtors' (non-)participation decisions can be understood through the lens of real options.
- Eligible countries compare the net benefits of participating in a debt relief initiative now with the value of waiting to potentially execute their participation option later, when they may have more information on the benefits and costs.
- The real option framing is corroborated with anecdotal evidence and a survival analysis that exploits cross-country and time variation in requests to participate in the Debt Service Suspension Initiative (DSSI), which provided temporary debt moratoria during the COVID-19 pandemic.
- Structured along the policy levers suggested by the real option framework, the paper discusses ways in which participation in debt relief initiatives can be made more attractive to debtor countries.
Empirical approach and scope
- Methodology:
- Anecdotal evidence supporting the real option interpretation.
- Survival analysis exploiting cross-country and time variation in requests to participate in the DSSI.
- Case and policy context:
- Focus on the Debt Service Suspension Initiative (DSSI) as the principal empirical context.
- COVID-19 pandemic period and temporary debt moratoria are central to the analysis.
- Publication details:
- Authors: Danny Cassimon, Dennis Essers, Andrea F Presbitero
- Publication date: September 8, 2023
- Series: IMF Working Papers, Working Paper No. 2023/187
- Issue: 187
- Volume: 2023
- Pages: 54
- DOI: https://doi.org/10.5089/9798400248504.001
- Stock No: WPIEA2023187
- ISBN: 9798400248504
- ISSN: 1018-5941
Key findings
- The decision to participate in debt relief initiatives is usefully modeled as a real option: countries weigh immediate net benefits against the value of waiting for more information.
- Empirical evidence from the DSSI supports the real option framing through observed timing and patterns of requests to participate.
- Reluctance to participate can be driven by:
- Uncertainty about the net benefits of participation.
- The option value of waiting for improved information or conditions.
- Potential costs related to credit ratings, market access, and future refinancing.
Policy levers and recommendations (structured by the real option framework)
- Make participation more attractive by reducing uncertainty about benefits and costs:
- Provide clearer, timely information on the magnitude and distribution of expected relief and transition costs.
- Reduce the option value of waiting:
- Implement time-limited incentives or staged offers that lower the relative value of delaying participation.
- Mitigate participation costs and downside risks:
- Address concerns about credit ratings and market access implications of participation.
- Design safeguards or compensatory measures to offset adverse signals to markets or rating agencies.
- Enhance predictability and transparency of debt relief initiatives:
- Clarify eligibility, terms, and sequencing to reduce informational frictions that sustain waiting behavior.
Subject areas and keywords
- Subject: Asset and liability management, Credit ratings, Debt relief, Debt restructuring, Debt service, Debt sustainability, External debt, Money
- Keywords: Common Framework, Credit ratings, Debt relief, debt relief initiative, Debt restructuring, Debt service, Debt Service Suspension Initiative, Debt sustainability, debt treatment, Global, IMF working paper 23/187, option framework, participation option, Real options, Sovereign debt, Sovereign debt relief, Survival analysis
IMF Working Papers. Debtor (Non-)Participation in Sovereign Debt Relief: A Real Option Approach. By Danny Cassimon, Dennis Essers, Andrea F Presbitero. September 8, 2023. Working Paper No. 2023/187.
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- Working Paper