Areas of expertise

Sovereign debt Management

Sovereign debt can be an important policy leaver for development. Sound debt management, which includes minimizing costs of debt, subject to an acceptable level of risk, is crucial to put debt to the service of development. Conversely, too much of the wrong sort of debt, can result in debt sustainability problems and undermine its potential for supporting economic growth. While it is not high debt per se that could hamper economic growth and development (as far as it is sustainable and deemed payable with high probability), the allocation of primary surpluses to debt payments in times of recessions makes debt a constraint for economic recovery and development. If debt becomes unsustainable, it needs to be restructured in a timely and decisive fashion. Evidence shows that kicking the can down the road by ‘gambling for resurrection’, and restructuring ‘too little’, only results in the need of further restructurings a handful of years down the road.

Sustainable debt for EMDEs

Emerging Markets and Development Economies (EMDEs) need to command the skills they require to be able to ensure a sustainable debt path that fosters stable economic growth, thereby enabling development and the green transition. On the one hand, this entails having specific technical, debt management abilities, ranging from relatively simple tasks such as correct data recording, to more complex ones, such as the capacity of conducting a Debt Sustainability Analysis (DSA). On the other hand, public officials in EMDEs need to be attuned to the politics of sovereign debt management and sustainability. Sound debt management practices do not solely require a professional Debt Management Office, for instance, but need to be nested in a broader institutional environment which vests them with the required political authority to be able to fulfill their purpose of enabling debt sustainability. Similarly, DSAs are as much a probabilistic exercise, as they are a political one. It is the sovereign debtor who should be making the relevant decisions on what economic, political, and principle-based constraints should be included in the model. Finally, if debt needs to be restructured, it is of the essence for the debtor to understand the incentives of the various advisors they hire (and potential conflict of interests), as well as those of their creditors.

International Financial Institutions

The International Monetary Fund (IMF) plays a central role in the International Financial Architecture. It is the only global institution with a formal mandate of assisting countries when no one else would as lender of last resort. However, in a changing global landscape, making the IMF fit for purpose requires deep and fundamental reforms.

While a broad comprehensive governance and income model reform is not possible under the Fund’s Articles of Agreement, and while domestic and international politics make many reform-proposals difficult, there are concrete issues that could be pushed. Two of the most pressing ones include the re-channeling of Special Drawing Rights (SDRs) - to strengthen the IMF’s role as ‘lender of last resort’ and better equip its emergency liquidity facilities - and the revision of the IMF’s lending rate policy.

The Gaping Hole of the IFA

In contrast to domestic bankruptcy laws, the international debt architecture is characterized by the absence of a sovereign debt restructuring mechanism. In this context, bargaining between a distressed debtor and its creditors is based on decentralized market-based instruments. Essentially, this entails that sovereign debt restructuring negotiations are framed by established debt contracts between the debtor, and its creditors - be them other states, multilateral institutions, banks, bondholders, or others. Given that debt contracts cannot possibly contemplate all contingencies that may arise and considering the changing debt landscape since the Global Financial Crises debt restructurings have become more complex and protracted, at the cost of debtors and (most of) their creditors.

Reform of the international debt architecture

Despite important multilateral initiatives in recent years, such as the Common Framework for Debt Treatment beyond the DSSI, the international debt architecture continues to be ill equipped to ensure efficient, equitable and expedient restructurings. In addition to building capacity in Emerging Markets and Development Markets to be better prepared in case a restructuring becomes necessary, the international debt architecture thus needs to be made fit for purpose. This includes considering the full range of potential policy measures, ranging from statutory measures, such as domestic legislation in financial centers, to contractual innovations, such as state-contingent debt instruments. Debt transparency on the side of both sovereign debtors and private, bilateral, and multilateral creditors is equally important.

According to the United Nations Conference on Trade and Development, Emerging Markets and Developing Economies (EMDEs) face a USD 4 trillion gap in investment to achieve the Sustainable Development Goals. Increasing Multilateral Development Banks (MDBs) lending capacity is thus urgent. Multilateral Development Banks (MDBs) play a substantive role here, as they can provide more affordable financing and can provide resources for adapting to climate change and improving the resiliency of these economies. The role of Regional Development Banks (RDBs) in particular needs to be enhanced given their long-standing relationship with and knowledge of local markets and institutions. Increased capital contributions are one of the most effective mechanisms to increase MDB’s and RDB’s lending capacity. But there are also others, from continued improvements in their Capital Adequacy Frameworks, to the establishment of a greater variety of innovative financing sources and instruments. The overarching goal should be to ensure that EMDEs have the required resources to conduct transformative, market-creating policy that transforms their productive matrix, reduces poverty and inequality, and enables the green transition. Globally, MDBs and RDBs must have the resources not only to achieve the Sustainable Development Goals, but to address transboundary challenges and global public goods.