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Sustainable Debt Restructuring in the time of Covid 19: Investment and Non-Elite Participation

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  • Sayantan Ghosal
  • Dania Thomas

Abstract

This paper demonstrates that the medium-term consequences of the Covid 19 shock on developing countries depends on how sovereign debt obligations are restructured now. We develop a necessary and sufficient condition for sustainable debt restructuring which implies an upper bound on the interest rate which debt is restructured. We show that this upper bound on the interest rate is increasing in the level of financing (the sum of debt repayments rolled over, debt write-downs and new investment). We use our result to examine the sustainability of a debt standstill. Using data from the UN Economic Commission for Africa, we carry out a simple calibration exercise to quantify the impact of investment on interest rate charged. We examine the role of contingent contracts and show they may have a limited role in ensuring debt sustainability. We examine the role of creditor heterogeneity and debtor moral hazard and demonstrate that participation in the debt restructuring process by community groups, civil society organisations is key to restoring sustainability.

Suggested Citation

  • Sayantan Ghosal & Dania Thomas, 2020. "Sustainable Debt Restructuring in the time of Covid 19: Investment and Non-Elite Participation," Working Papers 2020_17, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2020_17
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    References listed on IDEAS

    as
    1. Silvio Contessi, 2012. "An application of conventional sovereign debt sustainability analysis to the current debt crises," Review, Federal Reserve Bank of St. Louis, vol. 94(May), pages 197-220.
    2. Devadas,Sharmila & Pennings,Steven Michael, 2018. "Assessing the Effect of Public Capital on Growth : An Extension of the World Bank Long-Term Growth Model," Policy Research Working Paper Series 8604, The World Bank.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Debt; restructuring; sustainability; investment; negative shock; political economy; elite; non-elite; UNCTAD road map;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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