Spring 2022 - Sovereign Debt Architecture, Suspended
A Manifesto for Going from Billions to Trillions in Climate Finance Now: Some Highlights of the Bridgetown Initiative

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October 5, 2022

A Manifesto for Going from Billions to Trillions in Climate Finance Now: Some Highlights of the Bridgetown Initiative

Avinash Persaud, Barbados’ Special Envoy for Climate Finance and Emeritus Professor of Gresham College in the UK[1]

The geography of the political economy, not scientific ignorance, is why climate mitigation is not happening fast enough, and average global temperatures are blowing through cascade points causing substantial loss and damage. Repeatedly telling people to follow the science, just louder and slower each time like an Englishman abroad, has not and will not work. The countries most able to do something about it are impacted the least. America’s summer of floods and Europe’s scorching summer will focus the mind for a moment but will not trouble annual National Income statistics. Melting glaciers and an extreme monsoon in Pakistan will. The intensification of tropical cyclones means that some small island tropical states have lost 200 percent of national income in a few hours.

The worst temperature increases and sea level rises will occur between latitudes 23.5 degrees north of the equator and 23.5 degrees south—the tropics of Cancer and Capricorn. Over 50 percent of the rise of sovereign debt in many countries between the Tropics of Cancer and Capricorn are the result of the public expenditures and loss of revenues that follow fast or slow onset external disasters. Behind this frontline, national income may actually rise temporarily as growing seasons widen. English vineyards are flourishing. It is a cruel twist of fate that the countries least impacted and with the greatest wealth today often have their wealth through contributing most to the stock of greenhouse gases that cause global warming.

Those on the frontline understand the injustice. But burning up and drowning also focuses the mind on what works, not what sounds good. It is morally right that those most impacted but least responsible receive grants to address loss and damage and build resilience from those most responsible, who should be doing the most to mitigate the climate crisis. But what we experience is that Paris is stuck. Grants are scarce and not becoming less so. Overseas development assistance is being diverted to foreign policy goals, not rising to the climate challenge. Touted technological and financial innovations are not to the relevant scale or time. Developing countries do not have the balance sheet for much more debt, and concessional loans are also scarce. Having reflected long and hard on this constellation, a loose collection of concerned countries, academics, and civil society have developed five integrated “asks” that will move the needle and are achievable, in part because they do not require current transfers from wealthy country taxpayers. These five are part of the broader ‘Bridgetown Initiative’ unveiled by Prime Minister Mottley of Barbados in September. 

#1. One of the most impactful of the five would be for every debt contract to have natural disaster and pandemic clauses like those recently included in all of Barbados’s sovereign bonds. Under these clauses, when an independent body declares an external emergency, debt service is suspended for two years and then paid with interest for two years at the end of the original term. Creditors are kept whole, with interest, so they could swap the later receivables for current ones from a commercial intermediary if they wanted. And the borrower gets liquidity exactly when they need it.

Most emerging market crises start as liquidity crises. If all developing countries had these clauses when the pandemic hit, they could have instantly released and redirected $1 trillion from debt service to pay for their Covid response. No other instrument comes close. The G20’s Debt Service Suspension Initiative was one hundred times smaller, clunky and conditional. Arguably, creditors are better off holding bonds with these clauses than without because, at times of great uncertainty, they have a pre-determined plan that avoids a disorderly default. But there is always apprehension around new instruments, especially when borrowers propose them. Walking the talk, Barbados is the world’s largest issuer of sovereign bonds with natural disaster clauses and the first with pandemic clauses. For these clauses to catch on, we need large borrowers to adopt them in their own debt to help to normalise them, as the UK, Canada, and continental Europe did with Collective Action Clauses earlier.

This contract revolution may not seem romantic. Yet if all debt contracts had these—including contracts with multilateral institutions like the World Bank and bilateral official lenders like China, as well as private and hybrid institutions—it would make international finance more shock-absorbing without costing lenders a cent. It would redraw the global debt architecture.

#2. During the pandemic, the World Bank agreed to give temporary access to concessional funding for middle-income countries badly hit. The existing aid architecture limits concessional finance to countries with a national income per head per year of less than $1,255 (the 2023 eligibility level); such finance often comes with fifty-year money with long grace periods and low-interest rates. Donors originally came up with the criteria to focus limited aid on the poorest, but today over 70 percent of the world’s poor live in middle-income countries not eligible for concessionary finance. Every dollar spent on resilience-building in a climate-vulnerable country saves between $4 and $7 when a climate disaster happens. Yet middle-income countries cannot get these future savings because their access to current borrowing is limited. This is seeding a future crisis. It would make better economic and investment sense to change the aid architecture to give limited access to concessional funding for climate-vulnerable countries so they can invest in climate resilience before the climate event. The governing boards of the World Bank, African, Asian, and Inter-American Development Banks and other multilateral development lenders need to get out their pens.

#3. If we are expanding eligibility for concessional finance, we need to expand the lending capacity of the multilateral development banks (MDBs). They can lend up to $1 trillion more without current transfers from shareholders if they do three things:

  • The governing boards of the MDBs must adopt the G20 Working Party recommendations on Capital Adequacy, especially the call to shift from ultra-risk-averse ratios while preserving existing capital and ratings. Too many MDB loan officers prefer saying ‘no’ over a conditional yes.
  • The boards must also allow MDBs to use guarantees or callable capital, to boost capital and lending without a current transfer.
  • The IMF Board must allow the MDBs to hold Special Drawing Rights (SDRs) as part of their capital, and current SDR holders should re-channel less than one-fifth of the over $500 billion of unused SDRs.

#4. There is a limit, however, to the amount developing countries can borrow, even on concessional terms. Part of this is the result of the overly conservative conventions of the debt sustainability analysis used by credit ratings and international financial institutions, but there is also a limit at which debt service begins to crowd out investments in development. We need MDB boards to prioritise those things that cannot be funded in any other way, such as most climate adaptation, public health, and other sustainable development goals.

But the burden of funding global public goods cannot all rest on the balance sheets of the poorest countries. We need a third balance sheet not of sovereigns or MDBs, to facilitate those things that benefit the whole world but can be funded by the sponsors of projects not countries. We must establish a Global Climate Mitigation Trust, backed by a new $650 billion issuance of SDRs. It would be a global balance sheet to fund global public goods underpinned by a global financial instrument. SDRs activate a fraction of the value of $12.7 trillion of reserves set aside for a rainy day by the central banks of IMF Members. That rainy day has come. We could model the Trust on the two other SDR-backed trusts that already exist, the RST and PRGT. The UNFCCC’s Green Climate Fund should be one of the trustees. Countries would rechannel their unused SDRs to the Trust, which would use them as quality collateral to borrow cheaply in the capital markets. These borrowed funds would then be on-lent or invested in an auction won by the sponsors of projects that have the biggest, fastest impact on global warming anywhere in the world. We share one climate. This process will leverage private savings, social impact investors, and technology; promote the best environmental, social, and governance standards; focus on the biggest wins for the climate from transitioning coal-fired power stations to fixing methane leaks; and it will do so off the balance sheets of hard-pressed governments.

#5. The four “asks” above will have a substantial impact, but they do not require any country to write a cheque to another, and they build on existing debt instruments, familiar MDB financing tools, and IMF trusts. If we had started doing this fifteen years ago, we would be well on the way to limiting global warming below cascade points. But we didn’t. Now we have actual loss and damage. Who will tell the 30 million homeless in Pakistan to their faces that the only solution to their losses is not to be distracted from mitigation? Our fifth and most challenging task is to fund loss and damage.

The Bridgetown Initiative emphasizes the importance of having a loss and damage funding mechanism, but does not offer a single solution. Maybe there shouldn’t be just one, but let me propose one for the current moment that is meaningful and achievable and in keeping with the spirit of the Initiative. Loss and damage funding needs to be immediate, triggered by an independent assessment that a disaster has occurred. There is no room for long and conditional board decisions in an emergency. The funds must be in grant or grant-like form, such as zero interest bonds with long repayment periods. Here we need a real transfer of resources. We cannot burden a country that has temporarily lost market borrowing capacity with more debt service. But we could limit what we are covering in the first instance to reconstruction costs after a disaster—recognising that not all reconstruction will be physical and not all disasters immediate, but not including every historical and adaptation cost. We could further limit international loss and damage funding to losses above an agreed threshold, such as 5 percent of National Income, or a similar cofinancing arrangement to incentivise local investments in resilience. In today’s cost-of-living crisis we could agree that for every 10 percent reduction in the global benchmark price of fossil fuels from today’s elevated levels—so no additional cost from today’s prices—a minimum of 1 percent would be diverted to an International Reconstruction Fund. It could be housed at the International Maritime Organization’s Oil Pollution Compensation Fund, which has been raising funds to compensate for analogous externalities through a levy on international oil exports for over 25 years.

Time has run out. We are burning up and drowning. While waiting, we have had the time to recognise the magnitude of apparently small things and see the elusiveness of seemingly great things. These five strokes make up a manifesto for going from billions to trillions. Without much romanticism they will deliver more change to the debt, aid, and funding architecture than we have seen in a lifetime. Meaningful, durable change needs all. Please join us. 


[1] Avinash Persaud is Barbados’ Special Envoy for Climate Finance, a participant in the Bridgetown meetings on reforming international finance, a former international investment banker and financial regulator, and Emeritus Professor of Gresham College in the UK.


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