SPP Research Seminar: Borrowing Costs and Debt Relief

Can debt moratoria help countries weather negative shocks? We study the bond market effects of an NPV-neutral 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, our
results do not support the concern that debt relief could generate stigma.

A summary is on VOXEU, the full working paper is on SSRN.