Never again. That was the imperative that in July 1944 sent delegates from 44 nations to meet in Bretton Woods, New Hampshire, to refashion the postwar international economic system.
Because of the coronavirus crisis, we are again at a point when global leaders must ask what they can do to ensure that we will never again suffer the same loss of life and livelihoods from a global disaster. One proposal missing from the table is for a much-needed shock absorber as risks such as climate change and falling biodiversity intensify.
When the pandemic first hit, G20 Leaders, representing some of the largest economies, quickly came up with the debt service suspension initiative, or DSSI, to cover the official debts of poor countries. Under International Development Association rules followed by the World Bank and OECD members, poor countries with a gross domestic product per capita of less than $1,185 per annum are eligible for concessional finance — loans given on more lenient terms than by the market.
The DSSI speedily agreed, but it was inadequate for the scale and reach of the crisis. Globalisation has contributed to a convergence of income between countries but a divergence within them. Today, over 75 per cent of the world’s poor live in countries with a per capita GDP above $1,185, so aren’t eligible for concessionary finance. Yet these states don’t have the fiscal or monetary space to address a pandemic or natural disaster and protect their poor. The threat a catastrophe poses to their solvency narrows that space further.
Of the 20 countries with the most significant GDP contraction during 2020, only Kyrgstan was eligible for the DSSI. The initiative offered liquidity of up to $12bn to the poorest countries, but developing countries that were not eligible had to meet over $1tn in debt service payments by the end of 2021, almost two-thirds of which was to private creditors. The difference between the assistance offered and the liquidity needed in these countries must be addressed to make the world more resilient when the next disaster hits.
During its debt restructuring in 2018-2019, Barbados exchanged old debt for approximately $5bn of sovereign bonds with natural disaster clauses and is now the largest issuer of such bonds. Under this style of clause, when an independent organisation, such as the World Health Organization or a meteorological agency, declares that a natural disaster has occurred, debt service is immediately suspended for two years, with the payments added back at the end of the term of the loan or bond. If all borrowers had issued bonds with Barbadian-style clauses during the pandemic, then the more than $1tn in debt servicing would have been available for developing countries to fight Covid-19.
Barbadian domestic bonds have been trading for approximately two years and international ones for twelve months. There is no evidence that its debt trades at a discount compared to countries with a similar credit rating that do not have these clauses — some signs of the opposite. But for most developing countries, the alternative to an automatic, predictable, and pre-determined liquidity arrangement in the throes of a GDP-crushing catastrophe is a messy rescheduling of debt payments.
Three tweaks are needed to maximise the benefits of disaster clauses and support their universal adoption. First, they should be “NPV (net present value)-neutral”. Time has value, which is reflected in interest rates, and so when the debtor makes the missing payments later, they need to be adjusted up by an interest rate to ensure that the creditors are not worse off. Otherwise, they will implicitly be writing insurance against disasters. And as climate change intensifies they will not want to do that.
Second, the clauses should be “strip-able,” creating a market in maturity transformation. If a bank did not want to suffer the loss of liquidity in a disaster, it could swap the clause to a life insurance or pension fund that has short-term liquidity but wants longer-term assets. Finally, pandemics need to be explicitly included. Barbadian-style clauses only cover events outside of the control of the country that can be declared within hours of — or even before — they hit.
If G20 countries committed to adopting Barbadian-style natural disaster clauses, there would automatically be one 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 catastrophe, but there would be no better way of maximising the scale of participation in the crisis response.
Avinash Persaud is Emeritus Professor of Gresham College and Chair of the CARICOM Commission on the Economy