Debt Relief, Liquidity Provision, and Sovereign Bond Spreads
33 Pages Posted: 12 Oct 2020
Date Written: October 9, 2020
To mitigate the effects of the COVID-19 crisis, the international community has endorsed a program suspending debt service payments for poor countries. We study the effects of this NPV-neutral debt relief on sovereign borrowing costs. Using daily data on sovereign bond spreads and the synthetic control method, we show that countries eligible for debt relief experience a larger decline in borrowing costs compared to similar, ineligible countries. This decline is stronger for countries receiving a larger relief, suggesting that the effect works through liquidity provision. By contrast, our results do not support the concern that debt relief could generate stigma.
Keywords: Debt relief; Sovereign debt, Developing countries, Sovereign bond spreads, Debt Service Suspension Initiative
JEL Classification: G21, O12, O55
Suggested Citation: Suggested Citation