On the potential of sovereign state-contingent debt in contributing to better public debt management and enhancing sustainability outcomes

Ulrich Volz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Sovereign state-contingent instruments (SCDIs) have been suggested as complements or alternatives to traditional sovereign debt instruments for a long time, but with little uptake. Markets for SCDIs have suffered from low liquidity and issues around measurement. This article argues that the escalating climate and ecological crises provide a strong rationale to reconsider the use of sovereign SCDIs as the physical and transition impacts of climate change and environmental degradation are increasingly altering the risk profile of sovereigns. The use of risk-linked sovereign instruments such as cat bonds or resilience bonds and embedding disaster risk clauses in sovereign debt contracts would be an important way for governments, especially in highly climate-vulnerable countries, to mitigate climate risks and scale up investment in resilience. Moreover, instruments such as sustainability-linked bonds that incentivise sustainability-oriented policies and investments could help to bring about better sustainability outcomes and contribute to greater debt sustainability. SCDIs can also play an important role in facilitating debt restructurings. The international community, supported by key institutions like the IMF and the major multilateral development banks, should make a concerted effort to promote the widespread adoption of sovereign SCDIs to support better public debt management, the climate-proofing of public finances, and the achievement of more ambitious sustainability outcomes.

Keywords: debt restructurings; GDP-linked bonds; sovereign debt; state-contingent debt; sustainability-linked bonds (search for similar items in EconPapers)
JEL-codes: F34 H63 Q54 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2022-12-16
New Economics Papers: this item is included in nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Globalization and Development, 16, December, 2022, 13(2), pp. 379 - 409. ISSN: 2194-6353

Downloads: (external link)
http://eprints.lse.ac.uk/122922/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122922

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().