A Bridge To Climate Action: A Tripartite Deal For Times of Illiquidity

Vital investment to re-ignite growth and progress on climate action in developing economies will fail if the current debt overhang remains unaddressed. While the international community is preparing to move from billions to trillions, efforts to translate these investments into the green transition will remain vain as long as developing countries continue to struggle with debt crises. Indeed, much of the new flows would leak out as debt service, whilst economies in disarray will be unable to increase their investments in a sustainable future. A bridge between the current crisis and a time when efforts can go in earnest to save the planet is urgently needed. Insolvent countries need debt reduction, a difficult process under the G20’s “Common Framework†, and one that crucially needs to be further improved. However, most countries that are currently facing financial stress are in fact suffering from illiquidity, rather than insolvency. This situation is due to the coincidence of a rise in global interest rates at a time when bonds are maturing and the amortization of bilateral loans has risen. For these countries, coordinating debt rescheduling among their diverse creditors is essential. This paper proposes a “bridging program†that unlocks net positive flows for countries facing liquidity constraints. The program operationalizes a tripartite deal: Multilateral development banks (MDBs) would increase their financing for new investments, including those linked to climate objectives; creditors would agree to reschedule their claims in the future; and countries would commit to stabilize their economy and engage in efforts to promote recovery.