Debt Relief, Liquidity Provision, and Sovereign Bond Spreads

33 Pages Posted: 12 Oct 2020

See all articles by Valentin Lang

Valentin Lang

University of Zurich

David Mihalyi

CEU; Natural Resource Governance Institute (NRGI)

Andrea Presbitero

Johns Hopkins University

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

Lang, Valentin and Mihalyi, David and Presbitero, Andrea, Debt Relief, Liquidity Provision, and Sovereign Bond Spreads (October 9, 2020). Available at SSRN: or

Valentin Lang

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

David Mihalyi

CEU ( email )

Nador 9
Budapest, 1051

Natural Resource Governance Institute (NRGI) ( email )

80 Broad Street
New York, NY 10004
United States

Andrea Presbitero (Contact Author)

Johns Hopkins University ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

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