The Effect of Payments Standstills on Yields and the Maturity Structure of International Debt

Bank of England Working Paper No. 184

23 Pages Posted: 25 Sep 2003

Date Written: 2003

Abstract

Payments standstills have been suggested as a tool for the resolution of financial crises in emerging markets economies. A simple model is developed here to examine the implications of standstills for yields and the maturity structure of debt. An emerging market country chooses to sell short and long-term debt to risk-neutral international investors. The key assumptions are that the level of short-term debt increases the probability of crisis, that crises have costs that spill over into the next period, and that the orderly resolution of financial crises will reduce the cost of crises. A standstill is depicted as an orderly rollover of short-term debt. Standstills have the benefit of reducing the proportion of short-term debt and so lower the probability of crisis. This comes at the cost of generally lower expected output.

Keywords: Standstills, international financial crises

JEL Classification: F34

Suggested Citation

Martin, Benjamin and Penalver, Adrian, The Effect of Payments Standstills on Yields and the Maturity Structure of International Debt (2003). Bank of England Working Paper No. 184, Available at SSRN: https://ssrn.com/abstract=425788 or http://dx.doi.org/10.2139/ssrn.425788

Benjamin Martin (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Adrian Penalver

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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