Sovereign Debt Standbills

As a response to the economic difficulties triggered by the COVID-19 pandemic, the G20 implemented the Debt Service Suspension Initiative (DSSI), a standstill or postponement of official bilateral sovereign debt payments for some of the poorest countries. The G20 and others also called on private creditors to offer comparable terms but this did not materialize. We first show that a standard default model can account for the decline in sovereign spreads triggered by the DSSI. The model also accounts for the private creditors' reluctance to participate in a debt standstill: Except when it avoids a default, a private-creditor standstill implies sizable capital losses for debt holders. Furthermore, while sovereign debt standstill proposals emphasize debt payment suspensions without write-offs on the face value of debt obligations, we find that complementing private-creditor standstills with write-offs could reduce debt holders' losses and simultaneously increase sovereign welfare gains. Our results cast doubts on the emphasis on standstills without a write-off.