Groups urge G20 to adopt debt-for-climate swaps

According to the latest news, three think-tanks are expected to unveil a proposal to prevent a looming debt crisis on June 28. The plan aims to help heavily indebted countries accelerate moves toward more sustainable growth and a low-carbon economy.

The “Debt Relief for a Green and Inclusive Recovery” project is modeled on Brady bonds issued by Latin American countries in the late 1980s. It allowed commercial banks to exchange their claims on developing countries into tradable instruments and get debt off their balance sheets.

Remarkably, the proposal is developed by the Boston University Global Development Policy Center, the Heinrich Boell Foundation, and the Center for Sustainable Finance at SOAS University of London. It calls for G20 to set up a new global facility to guarantee new bonds that could be swapped by private creditors for old debt with a notable haircut.

The COVID-19 pandemic and the economic crisis have exacerbated high debt levels in many low- and middle-income countries. Notably, that hampered their ability to cope with the health and economic crisis and climate-proof their economies.

The Group of 20 major economies response thus far has focused on the poorest countries, leaving out 22 of the 72 countries seen at high risk of debt distress.

According to the Institute of International Finance, debt levels have resumed surging in emerging markets, reaching an all-time high of more than $86 trillion in Q1.

The Group of 20 major economies needs to act now

As we know, major economies are using coronavirus stimulus funds for kickstarting a green pivot. However, it has proven challenging to marry the urgent need for debt relief with the push for turning economies greener – especially for resource-focused economies.

The groups announced the G20 needs to act now. They added that past experience shows that delaying the response to debt crises leads to worse outcomes and higher costs for debtors and creditors alike.

They urged G20 finance officials to expand the debt treatment framework to include middle-income countries and to back Brady-type credit enhancements for new bonds that could be swapped for old debt. Remarkably, G20 finance officials will meet on July 9-10.

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