Borrowing Costs After Sovereign Debt Relief

Abstract

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.

Keywords: Debt relief; Sovereign debt, Developing countries, Sovereign bond spreads, Debt Service Suspension Initiative

JEL Classification: F34, H63, O23