FTW Green Brady Bonds | financial times

Kevin Gallagher is Professor and Director of the Center for Global Development Policy at Boston University.

The World Bank is from Venus and the IMF is from Mars. One wants to mobilize trillions of dollars from the private sector to prevent climate catastrophe and persistent poverty; the other warns that many developing countries are totally excluded from capital markets.

They both need to come down to Earth and see that there have to be massive debt write-downs throughout the developing world. The costs of inaction are rising.

On Venus, during the spring meetings last week, the World Bank adopted the Songwe-Popa report that developing countries need to mobilize more than $2.4 trillion per year, $1 trillion of which comes from external sources of foreign exchange, to finance a major global investment push to put emerging market and developing countries in a low carbon, socially inclusive and sustainable economy. resilient growth trajectories. The good things always.

However, the Bank’s solution is troubling: extract more capital from the existing balance sheet, starting with a drop in equity-to-loan ratio 20 to 19 percent to raise another $5 billion a year. Minuscule, but the World Bank believes the new capital will ‘de-risk’ developing countries and unlock trillions in private (foreign currency) capital markets that require a 20 percent return get out of bed.

Meanwhile, on Mars, the IMF notes that a growing number of countries are in over-indebtedness and cannot access international capital markets at all.

The external debt of developing countries has risen more than 175% since 2008 to $3.9 trillion, owed to a dizzying array of creditors: private bondholders and other private creditors (57%), multilateral development banks ( 21%), the Bank of Paris Club (6%) and China (4%).

What’s more, the The IMF is concerned that the G20 Common Framework is not working, and says fiscal consolidation does not improve debt ratios because it slows down growth. (Someone should tell him that fiscal consolidation is the cornerstone of IMF loans.)

The World Bank, IMF, private creditors and some debtors held a roundtable to get the private sector and China to provide debt relief and to ask China to stop insisting that MDBs do too. Reportedly China will back down if MDBs agree to provide net positive grants and concessional financing for countries in difficulty.

Unctad shows that negative net transfers aboundso this would be very welcome.

Does this mean that China and private bondholders will also start cutting? Without the full participation of private bondholders, China and MDBs, developing economies are on shaky ground and have no prayer to meet development and climate goals.

A call from the earth came from the V20 group of the most climate vulnerable countries that are paying the price for inaction (there are actually 58 members, but V58 presumably didn’t have the same timbre).

The V20 wants to link debt relief to “climate prosperity” and bring creditors to the table through a Brady-like bond guarantee mechanism. He Debt relief for a green and inclusive recovery project (where, full disclosure, I am co-chair) has calculated the proposal.

There is a net present value of $812 billion in foreign debt held by the more than 60 countries in or near debt distress, of which approximately $444 billion is held by China’s private sector and commercial creditors. Meyer, Reinhart, and Trebesch. have shown that the historical average for haircuts has been 39 percent of the NPV of external debt (scalping in the HIPC/MDRI era was 64 percent). In illustrative terms, then, we say that approximately $173-284 billion would have to be written off to put these countries on the right track.

Bilateral government creditors will need to lead by example, but private creditors and Chinese lenders could be encouraged to participate through a similar scheme to Brady bonds. That experience says that said instruments today would have a maturity of 10 years for the new bonds and a Guaranteed Overnight Financing Rate of 3.5 percent of cost, with a partial guarantee of the principal (80 percent of the portion) and 18 months of interest payments fully guaranteed. The guarantee fund in these scenarios would have to be around 37,000-62,000 million dollars.

The World Bank could ensure that without harming its creditworthiness in a heartbeat. The covered bonds would be Sustainability linked to KPIs rooted in countries’ own recovery strategies, such as Climate Prosperity Plans, SDG Country Plansand Determined National Contributions under the Paris Agreement.

However, all carrots need sticks. The IMF should activate its “loans in arrears” and established a suspension of payments during the negotiations. He United Kingdom passed a law in 2010 preventing creditors from suing countries participating in the highly indebted poor countries (HIPC) initiative, and the US issued executive orders to force a brutal debt restructuring Iraq in 2002. Something similar could happen again.

Debt relief will only be part of the solution. Our study shows that even with HIPC-like haircuts, the most deprived countries would still have a long way to go: $1.26 trillion.

Countries also need fresh liquidity (plus SDRreformed IMF loans, etc.), concessional financing, and grants (through a staggered capital increase by the World Bank and MDBs, not just equity-to-loan ratio adjustments), and incentives for the private sector to invest in low-carbon, socially inclusive and resilient economic activities: the good things mentioned above.

In the 1990s, the world was burdened with debt and unable to meet the Millennium Development Goals. The World Bank and IMF finally did the right thing with HIPC, only after exhausting all alternatives.

We now face not only a drag on economic growth and lost decades of poverty, but also the existential threat of climate change. As the United Nations Environment Program has warned us, it is now or never. It is time for the World Bank, the IMF and the G20 to get down to business.