Report

Deadly Debt Crises: COVID-19 in Emerging Markets


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.

Keywords: Debt relief; Default risk; Sovereign debt; COVID-19; Pandemic mitigation; Partial default;

JEL Classification: E52; F34; F41;

https://doi.org/10.21034/sr.603

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File(s): File format is application/pdf https://www.minneapolisfed.org/research/sr/sr603.pdf

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2020-05-22

Number: 603

Pages: 44