Groups urge G20 to embrace so-called Brady-style bond swaps against 1980s climate

On Monday, three think tanks will unveil a proposal to avert a looming debt crisis and help heavily indebted countries accelerate their move towards more sustainable growth and a low-carbon economy, as they recover from the COVID-19 pandemic.

The debt relief proposal for a green and inclusive recovery is modeled on the so-called Brady bonds issued by Latin American countries in the late 1980s, which allowed commercial banks to swap their claims on countries developing into marketable instruments and getting 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 on the G20 to set up a new global facility to secure new obligations. which could be exchanged by private creditors for old debts.

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 protect their economies from climate change.

So far, the G20’s response 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 adhere to the G20 freeze on debt service payments and the broader common framework for dealing with debt.

Debt levels continued to rise in emerging markets, reaching a record high of over $ 86 trillion in the first quarter of this year, the Institute of International Finance said.

As major economies use COVID-19 stimulus funds to implement a green pivot, it has proven difficult to reconcile the urgent need for debt relief with the pressure to make economies greener, especially for resource-based economies.

“The G20 must be bold and it must act now. Past experience shows us that delaying the response to debt crises leads to worse outcomes and higher costs for debtors and creditors, ”the groups said in their report.

They urged G20 finance officials, which are due to meet July 9-10, to expand the debt-handling framework to include middle-income countries, and support Brady-style credit hikes for the news. bonds that could be exchanged for old debts, 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 agreement and the 2030 Agenda for Sustainable Development. , according to the report.

Countries failing to service debt on the new bonds would see the collateral released to private creditors, and the missed payments would have to be repaid by the country at the collateral facility, he added.

The IMF and World Bank should also conduct in-depth debt sustainability analyzes that take into account climate risks and fiscal needs to build climate resilience, and the fund should condition its programs on a restructuring process that includes creditors. private.

The groups’ detailed proposal comes months after IMF Managing Director Kristalina Georgieva said green debt swaps could accelerate action on climate change, and pledged to present an option for such instruments. by November.

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