Sovereign debt responses to the COVID-19 pandemic

The Widening of the North–South Divide: Debt Sustainability in a World Weakened by COVID-19

“…Indeed, a paradox emerges in that, in the context of rising interest rates, the indebtedness capacity drops exactly when it is most required. Arellano et al (2020) demonstrate that in EMDE, pandemic shocks heighten the risks of sovereign defaults, consequently limiting their capacity to borrow, while Zheng (2023) finds that in AE, where governments can issue more bonds to address unexpected fiscal shocks, there is no evidence to suggest that pandemic shocks lead to an increase in sovereign bond spreads.…”

“…Unlike AE, which benefited from favorable borrowing conditions, with interest rates at or near record lows, allowing for a relatively seamless increase in public borrowing to address the short-term impacts of COVID-19, low-income countries faced constraints in engaging in comparable deficit financing. In fact, Zheng (2023) found that sovereign spreads increased more in emerging economies than AE, though the former borrowed less during the pandemic. Despite the heightened necessity for fiscal expansion in these countries, surpassing the urgency seen in AE, this limitation persisted.…”

“…Considering the global natural experiment triggered by the COVID-19 outbreak, which functions as an exogeneous shock to borrowing needs (Zheng 2023), two questions are addressed: (a) How has the indebtedness of emerging markets and developing economies changed during the COVID-19 pandemic when compared to advanced economies? (b) Does this trajectory show the existence of a growing North-South divide?…”