Breaking The Vicious Cycle Of Debt And Climate Crisis: Debt Relief For A Green And Inclusive Recovery

In a decade where Emerging Market Developing Economies (excluding China) need to mobilize additional US$3 trillion – being US$1 trillion just in external resources – annually for sustainable development and climate goals, they are also disproportionately bearing the brunt of the climate crisis while absorbing the financial impact of monetary tightening in developed countries. With the Brazilian G20 presidency, there is a crucial opportunity to reshape the system to better serve the needs of developing countries. Brazil’s agenda for the G20 prioritizes social inclusion, sustainable development and combating hunger and poverty. Central to achieving these goals and mitigating global inequalities is the G20 discussion on debt relief. Within the G20, the Common Framework for Debt Treatments has been criticized as slow and ineffective. This policy brief proposes significant reforms to make it more efficient, inclusive and oriented towards climate and development goals. As a first step, the policy brief recommends that the G20 advocates for a reformed Debt Sustainability Assessment (DSA), requesting the International Monetary Fund (IMF) and World Bank to include development investment needs and climate shocks in the analysis. Moreover, it highlights the need for comprehensive debt relief from all creditor classes (public, private and multilateral). It recommends that the G20 create incentives for the participation of all creditor classes. For private bondholders and commercial creditors in particular, the G20 could consider an updated take on the Brady bonds of the 1980s – when private creditors provided debt relief in exchange for bonds with greater assurance of collectability – which helped to ease the Latin American debt crisis. Finally, for countries that are not in debt distress but lack fiscal space, the G20 could consider credit enhancement to lower the cost of capital for a green and inclusive recovery. This comprehensive approach could resolve the debt crisis in Emerging Market and Developing Economies (EMDEs) while forging a fairer global financial system. The G20 has a critical role in implementing these solutions, to help avoid a potential lost decade and enable a Decade ofAction.