Forgiven but not Forgotten:Emerging Market Credit Spreads Following Debt Relief

This paper examines the effects of large-scale debt reliefs aimed at Highly Indebted Poor Countries (HIPC) on the yield spreads of subsequent government debt issues. Due to scarce availability of existing measures, we originate raw data on 3,498 individual fixed-income securities to construct country-specific yield spreads. Our evidence suggests that HIPC governments pay an average yield spread premium of 298 bps on USD-denominated bonds and 128-333 bps on local-currency bonds compared to similar countries, which have not received debt relief. We estimate that the extra credit spread amounts to USD 24bn or roughly 19 pct of their relief. The premium cannot be explained by other common measures of sovereign default risk. We discuss indicators of moral hazard.