Spring Meetings

The recent rise in sovereign debt vulnerabilities in many developing countries merits attention, especially in the context of a new creditor landscape and rising shares of domestic, non-concessional and collateralized debts. Key policy questions include: How can sovereigns increase their resilience to exogenous shocks? Can state-contingent debt help? What role can official and private creditors play in preventing and resolving unsustainable debt situations?

Join the conversation via #SovDebt

Contributor: Analisa Ribeiro Bala, Secretary’s Department

The recent rise in sovereign debt vulnerabilities in many developing countries is cause for concern, especially in the context of a new creditor landscape and rising shares of domestic, non-concessional and collateralized debts. Panelists discussed the role of official and private creditors in preventing and resolving unsustainable debt situations, how sovereigns can increase their resilience to exogenous shocks, and the need for sovereign disaster risk financing for developing countries vulnerable to natural disasters. 

Moderator: Paul Collier, Professor, University of Oxford

Panelists:

Guillame Chabert, Co-Chair, Paris Club

Sonja Gibbs, Senior Director, Institute for International Finance

Keith Mitchell, Prime Minister, Grenada

Martyn Parker, Chairman, Global Partnerships, Swiss Re

Alberto Garcia Torres, Deputy Undersecretary for Public Credit, Ministry of Finance, Mexico

Key Points:

• -Mitigating shocks. Parker made the case for governments using insurance instruments for disaster risk reduction. He pointed to the Caribbean Catastrophe Risk Insurance Facility, and programs to improve flood resilience in the U.K. and U.S. as successful examples of governments transferring risk ex ante to manage budget volatility resulting from natural disasters. He added that contingent liabilities can be planned for, by embedding risk transfer into bond issuance, particularly for climate-exposed small states, and for commodity exporters. Torres suggested that governments interested in mitigating the impact of shocks use a combination of complementary financial instruments and policies. He attributed the success of Mexico’s disaster risk management framework to sound fiscal policy, and a deep local-debt market. Chabert suggested mainstreaming the use of countercyclical loans to help developing countries better manage shocks, though this would require a considerable degree of co-ordination between lenders. He also discussed the benefits, and challenges, associated with state-contingent debt instruments, in particular GDP-linked bonds.

• -Managing overborrowing. Gibbs emphasized that concerns about the risk of over indebtedness need to be balanced with EM financing needs, and stressed the importance of developing capital markets as a key element of debt management. She spoke about the challenges associated with the surge of sovereign bond purchases by public sector entities such as sovereign wealth funds and central banks, and of the increased complexity, in the context of a debt restructuring, of collaterized debt obligations. She also stressed the need to promote responsible lending, and crisis prevention through the pursuit of strong policies, data transparency, and open communication and dialogue with creditors and investors, through the adoption of the “Principles for Stable Capital Flows and Fair Sovereign Debt Restructuring” (endorsed by the G20 in 2004).

• -Restructuring. Mitchell spoke about the steps taken by the government of Grenada towards completing the comprehensive debt restructuring started in 2014, and the sizeable decline in Grenada’s debt-to-GDP ratio. He attributed its success to the government’s commitment to fiscal adjustment, in particular the decision to adopt a fiscal responsibility law, and to establish an independent fiscal committee. This provided a level of confidence to investors, and helped win buy-in from local stakeholders, including unions.

• -The Paris Club. Chabert noted the ways in which the Paris Club had responded to the changing debt landscape, including by broadening the membership to include other major global official creditors, and through innovation. Recent examples include the "hurricane clause" agreed by the Club in the restructuring of Grenada's debt—an example of a state-contingent solution—and the debt-for-environment swap the Club negotiated with Seychelles.

Quotes:

“Having your schools and your hospitals destroyed makes you value sovereign catastrophic risk insurance." Keith Mitchell

“Embedding natural risk transfer into bond issuance for developing countries increases resilience for small states, and for commodity exporters.”  Martyn Parker

“When trying to prepare for unfavorable outcomes, there is no silver bullet.” Alberto Garcia Torres

“Financing and borrowing at the end of the day is a means to growth. Responsibly managed, debt is a vital part of development.”  Sonja Gibbs

“Investors also have a role in helping keep overall debt at acceptable levels. They make lending decisions based on data, and to have good data you need transparency.” Sonja Gibbs