A Proposed ‘Brady Plan 2.0’ to Avert Sovereign Debt Crises in the Developing World

Among the challenges facing developing countries, none is arguably more crucial than the significantly deteriorating fiscal situation that threatens to stall economic recovery. Close to 60 percent of the poorest countries are either in or at high risk of debt distress. Last year, total debt service payments rose to over US$70 billion in several countries, exceeding combined expenditures on health, education, and social protection. Despite holding about 27 percent of the debt, the private sector accounts for 37 percent of the debt service due to the relatively higher cost of private debt. This Policy Brief recommends that the G20 explore a Brady bond-like scheme to replace the current private sector debt with new bonds that have guarantees and longer maturities. Under reasonable assumptions, the authors estimate that this scheme could reduce external debt repayments of developing countries by up to US$100 billion over the next five years and quickly restore much needed fiscal sustainability.