Three think tanks are on Monday to unveil a proposal to avert a looming debt crisis and help heavily indebted countries accelerate moves toward more sustainable growth and a low-carbon economy, as they recover from the COVID-19 pandemic.
The Debt Relief for a Green and Inclusive Recovery proposal is modeled on the so-called Brady bonds issued by Latin American countries in the late 1980s, which allowed commercial banks to exchange their claims on developing countries into tradable instruments and get debt off their balance sheets.
The plan — developed by the Boston University Global Development Policy Center, the Heinrich Boell Foundation and the Center for Sustainable Finance at the University of London’s School of Oriental and African Studies — calls for the G20 to set up a new global facility to guarantee new bonds that could be swapped by private creditors for old debt.
The pandemic and the associated economic fallout have exacerbated high debt levels in many low and middle-income countries, hampering their ability to respond to the health and economic crisis, and climate-proof their economies.
The G20’s response thus far has focused on the poorest countries, leaving out 22 of the 72 countries considered to be at high risk of debt distress. Private sector creditors have largely failed to join the G20’s freeze on debt service payments and the broader common framework for debt treatments.
Debt levels have continued to rise in emerging markets, reaching a record of more than US$86 trillion in the first quarter of this year, the Institute of International Finance said.
While major economies are using COVID-19 stimulus funds to implement a green pivot, it has proven challenging to marry the urgent need for debt relief with the push for turning economies greener — especially for resource-focused economies.
“The G20 need to be bold, and they need to act now. Past experience tells us that delaying the response to debt crises leads to worse outcomes and higher costs for debtors and creditors alike,” the groups said in their report.
They urged G20 finance officials, who are to meet on July 9 and 10, to expand the debt treatment framework to include middle-income countries, and to back Brady-type credit enhancements for new bonds that could be swapped for old debt, albeit with significant write-offs, to ensure private sector participation.
The guarantee facility should be overseen by the World Bank and the plan should require countries receiving debt relief to align their policies with the Paris climate accord and the 2030 Agenda for Sustainable Development, the report said.
Countries failing to service debt on the new bonds would see the collateral released to the benefit of private creditors, and missed payments would need to be repaid by the country to the guarantee facility, it added.
The IMF and the World Bank should also conduct enhanced debt sustainability analyses that account for climate risks and budget needs to bolster climate resilience, and the fund should make its programs conditional on a restructuring process that includes private creditors.
The groups’ detailed proposal comes months after IMF managing director Kristalina Georgieva said that green debt swaps could spur accelerated action on climate change, and pledged to present an option for such instruments by November.
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