The three think tanks will announce a proposal on Monday to avoid the imminent debt crisis, and helping countries with heavy debt recover from the new crown epidemic while accelerating their move towards more sustainable growth and a low-carbon economy. The proposal is called debt relief to promote a green and inclusive economic recovery. It is modeled on the so-called Brady bonds issued by Latin American countries in the late 1980s. The state’s debt is converted into tradable instruments, and the debt is stripped from its balance sheet.
The plan was formulated by the Boston University Global Development Policy Research Centre, the Heinrich Burr Foundation and the Centre for Sustainable Finance, University of London School of Oriental and African Studies, calling on the Group of 20 (G20) to establish a new global mechanism to provide guarantees for new bonds.
The new crown epidemic and its economic impact have made many low- and middle-income countries increasingly heavy debt burdens, hindering their ability to respond to health and economic crises and prevent the effects of climate change.
So far, the G20 initiatives have mainly targeted the poorest countries, and 22 of the 72 countries considered to be at high risk of a debt crisis have been excluded. However, private creditors have largely failed to participate in the G20 debt repayment freeze and the broad common framework of debt processing.
According to the International Finance Association (IIF), debt levels in emerging markets continue to rise, reaching a record high of over US$86 trillion in the first quarter. Although major economies are using anti-epidemic stimulus funds to initiate the transition to a green economy, it has proven challenging to combine the urgent need for debt relief with the promotion of a greener economy, especially for a resource-focused economy body.
They urged financial officials from the Group of 20 (G20) nations that will meet on July 9-10 to expand the debt processing framework to include middle-income countries and support the provision of Brady-style credit enhancement measures for new bonds. These bonds can be exchanged for old bonds to ensure the participation of the private sector, although there will be significant write-downs.
The report also stated that the guarantee mechanism should be supervised by the World Bank, and the plan should require countries that accept debt relief to make their policies in line with the Paris Climate Agreement and the 2030 Agenda for Sustainable Development.