Never again. It was imperative that in July 1944 delegates from 44 countries met in Bretton Woods, New Hampshire, to reshape the post-war international economic system.
Due to the coronavirus crisis, we are again at a point where world leaders must ask what they can do to ensure that we never again suffer the same loss of lives and livelihoods at the aftermath of a global catastrophe. A proposal missing from the table is that of an essential buffer as risks such as climate change and the decline in biodiversity intensify.
When the pandemic first struck, G20 leaders, representing some of the largest economies, quickly proposed the Debt Service Suspension Initiative, or DSSI, to cover the official debts of poor countries. Under the rules of the International Development Association followed by the World Bank and members of the OECD, poor countries with a gross domestic product per capita of less than $ 1,185 per year are eligible for concessional financing – loans granted on terms more lenient than those of the market.
The DSSI quickly agreed, but it was insufficient for the scale and scope of the crisis. Globalization has contributed to income convergence between countries but to divergence within them. Today, more than 75 percent of the world’s poor live in countries with a GDP per capita greater than $ 1,185, and therefore are not eligible for concessional finance. Yet these states do not have the fiscal or monetary space to deal with a pandemic or natural disaster and protect their poor. The threat that a disaster poses to their solvency further reduces this space.
Of the 20 countries with the largest GDP contraction in 2020, only Kyrgyzstan was eligible for DSSI. The initiative offered up to $ 12 billion in liquidity to the poorest countries, but developing countries that were not eligible had to pay more than $ 1 billion in debt service payments by now. by the end of 2021, of which nearly two-thirds were destined for private creditors. The difference between the aid offered and the cash needed in these countries must be taken into account to make the world more resilient in the next disaster.
During its debt restructuring in 2018-19, Barbados traded its old debts for around $ 5 billion of sovereign bonds with natural disaster clauses and is now the largest issuer of such bonds. Under this style of clause, when an independent organization, such as the World Health Organization or a meteorological agency, declares that a natural disaster has occurred, the debt service is immediately suspended for two years. , the payments being added at the end of the term. loan or obligation. If all borrowers had issued bonds with Barbadian-style clauses during the pandemic, then debt service of over $ 1 billion would have been available to developing countries to fight Covid-19.
Barbados’ domestic bonds have been negotiated for about two years and international bonds for twelve months. There is no evidence that its debt trades at a discount to countries with a similar credit rating that do not have these covenants – some signs to the contrary. But for most developing countries, the alternative to an automatic, predictable, predetermined liquidity arrangement plagued by a GDP-crushing disaster is a disorderly rescheduling of debt payments.
Three adjustments are needed to maximize the benefits of catastrophe clauses and support their universal adoption. First, they should be “NPV (Net Present Value) -neutral”. Time has a value, which is reflected in interest rates, and therefore when the debtor makes the missing payments later, they must be adjusted by an interest rate to ensure that the creditors are not hurting more. lotis. Otherwise, they will implicitly purchase catastrophe insurance. And as climate change intensifies, they won’t want to do that.
Second, the clauses should be “detachable”, creating a market for maturity transformation. If a bank did not want to suffer the loss of liquidity in a disaster, it could swap the clause for a life insurance or pension fund that has short-term liquidity but wants longer-term assets. Finally, pandemics must be explicitly included. The Barbadian-style clauses only cover events beyond the country’s control that can be reported within hours of – or even before – they occur.
If the G20 countries pledged to adopt Barbadian-style natural disaster clauses, there would automatically be a hundred times more liquidity to deal with the next global crisis, giving developing countries the ability to breathe. Not only would this match the scale and speed of any future disaster, but there would be no better way to maximize the scale of participation in the crisis response.
Avinash Persaud is Professor Emeritus at Gresham College and Chairman of the CARICOM Commission on the Economy