Center for European Studies
2021 CefES-JRC Webinar Series
and Debt Restructuring
in the Covid Debt Pandemic
CefES and the European Commission – Joint Research Centre are proud to host this webinar on "Debt Relief and Debt Restructuring in the Covid Debt Pandemic"
The economic harm being caused by the novel coronavirus may soon result in multiple sovereign debtors moving into default territory. But the existing playbook for dealing with multi-sovereign emerging market debt crises is blank. The only debt crisis scenario we know is protracted country-by-country and contract-by-contract negotiated workouts. As of this writing, expert groups are working on the design of a mechanism to run multiple sovereign debt workouts simultaneously. Those designs, however, will take time to configure and get international buy-in. This paper sets forth some options to provide temporary legal protection to the debtor countries in the meantime; while they are in need of diverting resources toward Covid amelioration. This is the notion of "legal air cover". The options we propose involve ex post state intervention in debt contracts. They are extreme and may come with risks. But we show that in the case of Greece, when intervention such as we envision was necessary, there were no negative spillovers on periphery Eurozone debt markets associated with the Greek ex post modification of contract terms.
Can debt moratoria help countries weather negative shocks? We study the bond market effects of an official 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, the results do not support the concern that official debt relief could generate stigma on financial markets.