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

Volz, Ulrich (2022) On the potential of sovereign state-contingent debt in contributing to better public debt management and enhancing sustainability outcomes. Journal of Globalization and Development, 13 (2). 379 - 409. ISSN 2194-6353

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Identification Number: 10.1515/jgd-2021-0071

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.

Item Type: Article
Additional Information: © 2022 Walter de Gruyter GmbH, Berlin/Boston
Divisions: Grantham Research Institute
Subjects: H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters
Date Deposited: 07 May 2024 09:33
Last Modified: 13 Jul 2024 03:57
URI: http://eprints.lse.ac.uk/id/eprint/122922

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