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Sovereign Debt and Grace Periods

Author

Listed:
  • Yasin Mimir

  • Yasin Kürşat Önder

  • Jose Villegas

Abstract

We document that grace periods are widespread, characterizing 83% of the external sovereign debt stock. This prevalence is largely driven by concessional (official) loans, which account for 73% of the stock and universally feature grace periods. To examine their macroeconomic role, we develop a quantitative model showing that grace periods enhance household welfare by reducing default risk and improving market completeness, yet also increase long-run dependence on non-contingent debt and raise sovereign spreads. We empirically validate these mechanisms using local projection estimates and conduct policy counterfactuals on shortened grace periods, voluntary debt exchanges, and the stigma premium associated with concessional finance.

Suggested Citation

  • Yasin Mimir & Yasin Kürşat Önder & Jose Villegas, 2026. "Sovereign Debt and Grace Periods," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 26/1137, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:26/1137
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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