Sovereign Debt Standstills

28 Pages Posted: 26 Jan 2021

See all articles by Juan Carlos Hatchondo

Juan Carlos Hatchondo

Indiana University Bloomington

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute

César Sosa‐Padilla

University of Notre Dame

Date Written: December 1, 2020


As a response to economic crises triggered by COVID-19, sovereign debt standstill proposals emphasize debt payment suspensions without haircuts on the face value of debt obligations. We quantify the effects of standstills using a standard default model. We find that 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. However, except when it avoids a default, the standstill also implies capital losses for creditors of between 9% and 27%, which is consistent with their reluctance to participate in these operations and indicates that this reluctance would persist even without a free-riding or holdout problem. Standstills also generate a form of 'debt overhang' and thus the opportunity for a 'voluntary debt exchange': complementing the standstill with haircuts could reduce creditors' losses and simultaneously increase welfare gains. Our results cast doubts on the emphasis on standstills without haircuts.

JEL Classification: F34, F41, H63, G10, E31, D31

Suggested Citation

Hatchondo, Juan Carlos and Martinez, Leonardo and Sosa‐Padilla, César, Sovereign Debt Standstills (December 1, 2020). IMF Working Paper No. 2020/290, Available at SSRN:

Juan Carlos Hatchondo (Contact Author)

Indiana University Bloomington ( email )

Dept of Biology
100 South Indiana Ave.
Bloomington, IN 47405
United States

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States


César Sosa‐Padilla

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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