The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

No abstract

The COVID-19 epidemic in emerging markets risks a combined health, economic, and debt crisis. We integrate a standard epidemiology model into a sovereign default model and study how default risk impacts the ability of these countries to respond to the epidemic. Lockdown policies are useful for alleviating the health crisis but they carry large economic costs and can generate costly and prolonged debt crises. The possibility of lockdown induced debt crises in turn results in less aggressive lockdowns and a more severe health crisis. We find that the social value of debt relief can be substantial because it can prevent the debt crisis and can save lives.

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The structure of sovereign debt has evolved over time from illiquid bank loans toward liquid bonds that are traded on the secondary market in the past two decades. This change in the debt structure is accompanied with a reduction in the duration of sovereign debt renegotiation; it takes on average 9 years to restructure bank loans, but only 1 year to restructure bonds. In this work, we argue that the secondary market plays an important role -information revelation -in reducing the renegotiation length. We construct a dynamic bargaining game between the government and the creditors with private information on the creditors' reservation value. The government uses costly delays as a screening device for the creditors' type, and so the delays arise in equilibrium. Moreover, the more severe is the private information, the longer the delays are. When we introduce the secondary market, the equilibrium delays are greatly reduced. This is because the secondary market price conveys information about the creditors' reservation and lessens the information friction. We also find that bond financing is more friendly to the debtor country; it increases ex-ante borrowing and investment and ex-post renegotiation welfare of the government.JEL: F02, F34, F51