Do we Need to Rethink Debt Policy in Latam?

Do we Need to Rethink Debt Policy in Latam?

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Do we Need to Rethink Debt Policy in Latam?

November 19, 2020

The COVID-19 shock raised concerns about debt sustainability both globally and in Latin America and has motivated a number of policy recommendations: debt standstills, issuing contingent debt or debt repurchases among others.

In this paper we argue that debt sustainability was not a problem in the region coming into the crisis and, more surprisingly, will not be an issue when coming out of it, a result that is consistent with the fact that markets have remained mostly open. We then review recent proposals and conclude that, while subject to improvements, the current contractual environment for sovereign debt appears able to deal with the uncertainties posed by the shock. In fact, we describe the recent restructurings of Argentina and Ecuador to show that large debt restructurings can successfully be implemented within the current framework, though we also find that the economic costs of such restructurings exceeded benefits, particularly in the case of Argentina.