never. In July 1944, representatives from 44 countries met at the Bretton Woods Conference in New Hampshire to reshape the post-war international economic system. This was a top priority.
Due to the coronavirus crisis, we are once again at a time when global leaders must ask them what they can do to ensure that we no longer suffer the loss of lives and livelihoods caused by the same global disaster. As risks such as climate change and declining biodiversity intensify, one proposal missing from the table is a much-needed shock absorber.
When the pandemic first hit, the leaders of the G20, representing some of the largest economies, quickly proposed the Suspension of Debt Service Initiative (DSSI) to repay the official debts of poor countries. According to the International Development Association rules followed by the World Bank and OECD members, poor countries with a per capita GDP of less than US$1,185 per year are eligible for preferential financing — more lenient than the loan conditions provided by the market.
DSSI quickly agreed, but it was not enough for the scale and scope of the crisis. Globalization has contributed to the convergence of income among countries, but differences have appeared within countries. Today, more than 75% of the world’s poor live in countries with a per capita GDP of more than US$1,185 and therefore are not eligible for preferential financing. However, these states have no fiscal or monetary space to deal with epidemics or natural disasters and protect their poor. The threat posed by disasters to its solvency has further narrowed this space.
Among the 20 countries with the worst GDP contraction in 2020, only Kyrgyzstan is eligible for DSSI. The initiative provides up to 12 billion U.S. dollars in liquidity to the poorest countries, but non-eligible developing countries must repay more than 1 trillion U.S. dollars in debt by the end of 2021, of which nearly two-thirds are to private creditors. The difference between the aid provided and the mobility required by these countries must be resolved in order to make the world more resilient when the next disaster strikes.
During the 2018-2019 debt restructuring period, Barbados replaced old debts with approximately US$5 billion in sovereign bonds with natural disaster clauses, and is now the largest issuer of such bonds. Under this form of clause, when an independent organization, such as the World Health Organization or the Meteorological Agency, announces that a natural disaster has occurred, it will immediately suspend debt repayment for a period of two years, and repay the loan or bond at the end of the term. If all borrowers issued bonds with Barbadian terms during the pandemic, developing countries could provide more than $1 trillion in debt service funds to fight Covid-19.
Barbados domestic bonds have been traded for about two years, and international bonds have been traded for 12 months. There is no evidence that compared with countries with similar credit ratings but without these terms, their debt transactions are discounted-some signs to the contrary. But for most developing countries, in the throes of a disaster that undermines GDP, the alternative to automatic, predictable, and predetermined liquidity arrangements is the chaotic rescheduling of debt payments.
Three adjustments are needed to maximize the benefits of the disaster clause and support its universal adoption. First, they should be “NPV (net present value)-neutral.” Time is valuable, and this is reflected in interest rates. Therefore, when debtors are delayed in repayment, interest rates need to be raised to ensure that the creditor’s situation will not deteriorate. Otherwise, they will cover the disaster secretly. As climate change intensifies, they will not want to do that.
Second, the terms should be “stripable” to create a market for term conversion. If the bank does not want to suffer a loss of liquidity in a disaster, it can replace the terms with a life insurance or pension fund that has short-term liquidity but wants long-term assets. Finally, epidemics need to be explicitly included. Barbados-style clauses only cover events outside the control of the state, and these events can be announced within hours or even before the event.
If the G20 countries commit to adopting Barbadian-style natural disaster clauses, then the liquidity for responding to the next global crisis will automatically increase a hundredfold, giving developing countries the ability to breathe. Not only does this match the scale and speed of any future disaster, but there is no better way to maximize the scale of participation in crisis response.
Avinash Persaud is Professor Emeritus of Gresham College and Chairman of the CARICOM Economic Committee