World Economy

G20 Plan to Stave Off Debt Crises Stalls

Policymakers for the G20 last year agreed on an initiative to create a market for the bonds.Policymakers for the G20 last year agreed on an initiative to create a market for the bonds.

Global efforts to create a market for growth-linked bonds that could help avert debt crises have stalled because none of the wealthy economies backing the drive are willing to take the lead and be the first to issue, sources told Reuters.

Growth-linked, or GDP-linked, sovereign bonds allow a country’s repayments to fluctuate depending on its level of economic growth or contraction—meaning, for example, a government would pay less if its revenues were hit by recession, Reuters reported.

Policymakers for the Group of 20 major world economies last year agreed on an initiative to create a market for the bonds. They commissioned an International Monetary Fund report into such debt, which could offer poorer economies some respite if they fell on hard times and stave off the kind of defaults seen recently in the likes of Puerto Rico and Ukraine.

The G20’s technical staff were briefed earlier this year on the IMF findings, which they will feed back to finance ministers and central bank governors before their G20 meeting in Germany on March 17-18.

They were told that the main obstacles to the project was a lack of investor demand and the stigma attached to such instruments, according to two sources close to the discussions. These kinds of bonds have so far only emerged from debt restructurings as a way to coax creditors to accept writedowns.

One plan mooted by the G20 last year was to have advanced economies issue first to make investors more comfortable with the bonds. But this has hit the buffers for the moment because no country wants to take the risk of being the first to issue the bonds, according to the sources.

“The technical discussions have suggested no big bang issuance is expected as of now or coordinated issuance that was initially thought may be possible,” said one of the sources who declined to be named as the discussions were private.

“It was more a recognition of the work that was done, a sharper understanding of the key impediments and a possible way forward. There is a little more work to be done before these things take off.”

The IMF’s report on state-contingent debt, which includes GDP-linked bonds, is due to be published in late April.

The second source familiar with the discussions added that deep skepticism about growth-linked debt within Germany, the hosts of this year’s G20, was also an impediment.


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