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

Ghosal, S. and Thomas, D. (2020) Sustainable Debt Restructuring in the time of Covid 19: Investment and Non-Elite Participation. Working Paper. Adam Smith Business School, University of Glasgow, Glasgow.

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.

• Item Type: Research Reports or Papers (Working Paper)
• Additional Information: Paper no. 2020-17.
• Keywords: Debt, restructuring, sustainability, investment, negative shock, elite, non-elite, UNCTAD road map.
• Status: Published
• Glasgow Author(s) Enlighten ID: Thomas, Dr Dania and Ghosal, Professor Sayantan
• Authors: Ghosal, S., and Thomas, D.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Publisher: Adam Smith Business School, University of Glasgow
• Copyright Holders: Copyright © 2020 The Authors
• Publisher Policy: Reproduced with the permission of the Authors