No Time for Lost Decade

Why Debt Restructuring Must Be Linked with Climate and Development Goals

A Call by DRGR Co-author Kevin P. Gallagher, Boston University

Fallout from the COVID-19 pandemic and Russia’s war in Ukraine will require large scale sovereign debt restructuring to prevent another lost decade of development for many emerging markets and developing countries; during the same ten years they urgently need to mobilize trillions of dollars to combat and adapt to climate change.

Just before the Russian invasion of Ukraine, the World Bank sounded the alarm that fiscal and monetary tightening in the advanced economies could lead to another sudden stop in capital flows to emerging markets and developing countries, followed by capital flight, exchange rate depreciation, and debt crises.

War only makes matters worse, as many emerging market and developing countries will suffer from skyrocketing oil, gas, and grain prices. Worse still, a default on Russia’s or Ukraine’s bonds could amplify that same cycle of depreciation and crisis.

A debt crisis could stymie the global recovery, cause a lost decade of development, and dash prospects of meeting climate targets in the Paris Agreement. Thus, debt relief efforts require urgent reinvigoration if they are to alleviate debt distress and unlock investments for a sustainable and inclusive recovery.

As the UN Intergovernmental Panel on Climate Change reiterated in March, global carbon dioxide emissions need to be slashed by over 40 percent in less than a decade, while at the same time countries need to invest in resilience and adaptation to worsening climate change impacts. To that end, the UN’s lower-bound estimates say an additional $8.8 trillion must be mobilized. The World BankOECD, and outside experts see that figure as closer to $30 trillion.

According to the International Monetary Fund (IMF), when done right, such investments can put the world economy on the right trajectory, in which growth becomes more robust, resilient, inclusive, and sustainable while avoiding catastrophic human, economic, and ecological costs.

The World Bank and the IMF have correctly called for a revamp of the Group of 20’s (G20) Common Framework for debt treatment. Almost two years into the G20’s attempt to create an emergency workout system during the pandemic, not one country has successfully completed the process. The lack of a success story and fears of credit rating agency downgrades and of losing access to private capital markets have resulted in few countries participating, despite their desperate circumstances.

Moreover, the Common Framework was not open to all countries facing debt distress, only the poorest, while the private sector and commercial actors from China balked at participating. Aside from the IMF’s Catastrophe Containment and Relief Trust, which provided $1 billion in relief for its debtors, multilateral creditors have not participated in debt relief, either. Worse, the G20 scheme does not link restructuring to resilient, inclusive, and low-carbon outcomes.

A robust and ambitious proposal linking debt restructuring with climate action came ahead of the 2021 United Nations Climate Change Conference (COP26) by ‘the Vulnerable 20 Group (V20),’ comprised of 48 finance ministers from the most climate-vulnerable emerging markets and developing countries. Similar to detailed proposals by outside experts, the V20 called for a “grand-scale climate-debt swap where the debts and debt servicing of developing countries are reduced on the basis of their own plans to achieve climate resilience and prosperity.”

Here’s how it could work. The IMF and the World Bank would reform their Debt Sustainability Analysis to incorporate climate risks and the spending needed to scale-up investments in climate resilience and the 2030 Agenda for Sustainable Development for each country. Such an analysis would determine if a country needs restructuring and the level of haircut provided. Eligible countries would then receive debt relief on their bilateral and multilateral debt. Bilateral debt restructuring would occur through the Paris Club and using exit instruments such as in China’s proposed ‘Shanghai Model’ to achieve sustainable outcomes. Analogous to the Heavily Indebted Poor Countries (HIPC) Initiative, multilateral creditors would sell gold to cover debts owed to them while maintaining their preferred creditor status.

Such action would be predicated on commensurate restructuring by private creditors and commercial creditors from other countries, like China. As a carrot, private creditors under a new scheme would receive ‘Brady-bond-like’ treatment through a guarantee facility at the World Bank designed to provide credit enhancements for new bonds linked to climate and development goals. These bonds would be swapped by private creditors and commercial creditors in China for old debt with a significant haircut. If debt service on the new bonds is missed, collateral from the guarantor would be released to the creditor, and the missed payment would have to be repaid by the sovereign to the guarantee facility. It is important to include guarantees as called for by the V20 to minimize the risk of credit downgrades as a result of restructuring.

As a stick, there could be a standstill on debt payments to all creditors during the negotiations, and lists of non-participating creditors could be published by the G20 to put a spotlight on their inaction. History has shown that the longer restructuring is delayed, the higher the costs borne by economies and livelihoods in the long run. And now we know that if we derail development and delay climate action, the costs of inaction could be catastrophic.

Debt restructuring is not a silver bullet against financial distress, economic contraction, and the climate crisis. It must be coupled with significant regulation of capital markets to better align with financial stability and shared climate and development goals. What is more, the IMF will need to issue regular allocations of Special Drawing Rights that are coupled with mechanisms to re-channel those allocations from countries that do not need them to countries that do. Multilateral development banks will also need to issue major capital increases and a redirection of their focus.

But without significant restructuring, there is just no way emerging markets and developing economies can withstand the costs of Russia’s war and recover from COVID-19 on a pathway that leads to greater resilience, heightened inclusivity, and closer alignment with the Paris Agreement. The IMF and World Bank have both called for reinvigorating the G20’s Common Framework, and the IMF’s Managing Director has pledged to deliver a debt-for-climate change proposal. It is urgent we add to this momentum and bake debt restructuring into climate change action.

There is just no time to lose.

This post was first published on on April 22, 2022.


Provide Debt Relief for a Green and Inclusive Recovery

SOAS ICOP Policy Briefing and Podcast by DRGR-author Ulrich Volz

In line with recommendations for a green and inclusive recovery developed by an international team of economists, DRGR-author Ulrich Volz, Director of the Centre for Sustainable Finance at SOAS, urges the UK government, host of COP26, to advance urgently needed steps.


V20 issues Statement on Debt Restructuring

The V20 Group are the finance ministers of the Climate Vulnerable Forum (CVF). The CVF encompasses 48 countries with 1.2bn people. Ahead of COP26, the V20 has issued a statement on Debt Restructuring that draws upon the proposal “Debt Relief for a Green and Inclusive Recovery (see our 3-minute video for a quick explanation).

3-minute video explaining the DRGR-proposal

V20 Statement on Debt Restructuring Option for Climate-Vulnerable Nations


Climate vulnerability is driving up the cost of capital and undermining debt sustainability

Climate vulnerable countries face considerable macro-financial risks stemming from climate change that threaten debt sustainability and harm investment and development prospects¹. A 2018 report on the relationship between climate vulnerability, sovereign credit profiles and the cost of debt commissioned by the UN in partnership with the V20 has shown that interest rates on debt of V20 countries are already higher than they would otherwise be, due to climate vulnerability². It estimates that exposure to climate risks has increased the cost of debt for V20 countries by 117 basis points, on average. This means that for every ten dollars climate vulnerable developing countries spend on interest payments, they have to pay another dollar because they are climate vulnerable. In absolute terms, this translated into more than USD 40 billion in additional interest payments for 40 climate vulnerable countries over the the period 2007–2016 on government debt alone. Incorporating higher sovereign borrowing rates into the cost of private external debt, the cost of higher interest payments due to climate risks are estimated at over USD 62 billion. The report estimated these additional costs to expand to between USD 146 – 168 billion over the next decade. Subsequent research, including by the IMF, has corroborated the positive effect of physical climate vulnerability on the cost of government debt³. Equally important is to ensure that financing options have long tenors to match the investment profile of low-carbon and adaptation projects.

A higher cost of capital impeded investment in development and resilience

A higher cost of sovereign debt has a broad impact on an economy as it also raises the cost of capital that the private sector has to pay⁴. The worsening of both public and private financing costs will hold back crucial investments and the development prospects of societies that are already punished by climate change. Perversely, countries that have not contributed to climate change effectively end up paying twice, as a floor: for the physical damage their economies face and through higher costs of capital, which spreads even more thinly the already resource-challenged coffers of vulnerable countries.

As financial markets increasingly price climate risks, and global warming accelerates, the risk premia of climate-vulnerable countries, which are already high, are likely to increase further. The impact of Covid-19 on significantly increased debt and on public finances risks reinforcing this vicious circle. In many developing countries, increased debt service is obstructing decisive crisis and recovery responses to COVID, and worsening development prospects. Thus, a report in 2020⁵ found that, external public debt service was greater than health care expenditure in at least 62 developing countries. It is a dire situation: instead of being able to support their people to weather the COVID crisis and invest in sustainable recovery, governments are required to repay their creditors. Furthermore, climate-vulnerable countries face the unenviable task of managing the increased financial costs of climate change as the physical impacts of climate risks themselves accelerate. Furthermore, with the 2021 IPCC 6th Assessment Report, climate change is happening faster and with greater impact than was understood when financing contracts between debtors and creditors were established. Vulnerable countries are therefore faced with a “force majeure” situation, whereby climate damages now happening or expected have evolved in such a way as to threaten debt sustainability. Unaddressed, a major global default event could occur within the coming decade.

To prevent a spiral of worsening climate vulnerability and rising debt, V20 must invest heavily in climate resilience. However, as rich nations fail to keep their pledges on climate finance, and as the impacts of climate change escalate, many of the most vulnerable developing countries continue to fall deeper into a debt crisis, which has been aggravated by Covid-19. Many V20 countries have insufficient fiscal resources to finance much-needed responses to the health and social crises caused by the pandemic, as well as crucial investments in climate adaptation. The service of public debt crowds out room for crucial investments that countries require in order to climate-proof their economies and establish a resilient, sustainable, and equitable recovery.

Recalling debt support and flexibility from the 1st V20 Climate Vulnerables’ Finance Summit

No single country or economy can unilaterally prevail in the climate crisis or COVID-19 pandemic. The expectations set out by the V20 on debt support and flexibility include debt forgiveness and suppression for highly- indebted climate vulnerable economies facing imminent liquidity crises, as well as Debt for Climate (DFC) swaps for interested middle-and-low-income vulnerable economies where new climate ambition and investments are restricted because of limited fiscal space. More flexibility on debt is required to enable V20 countries to finance climate action.

A major debt restructuring initiative for countries overburdened by debt is needed

Considering the pledge for an official mechanism to support debt sustainability issues, we propose a major debt restructuring initiative for countries overburdened by debt – a sort of grand-scale climate-debt swap where the debts and debt servicing of developing countries are reduced on the basis of their own plans to achieve climate resilience and prosperity. This could be achieved by agreement between debtors and creditors to redirect debt servicing payments towards new investments in rendering the underlying projects more resilient to climate change and compatible with the green transition. The freed-up resources from debt servicing could, for example, be invested in adaptation and nature-based solutions to render infrastructure projects more resilient to climate harm, while outdated thermal coal, diesel or other fossil power plants could, for instance, be recapitalized and transformed into hubs for green hydrogen production, waste to energy or biomass power generation facilities. Such a debt restructuring initiative should not only address short-term needs but also lay the foundation for inclusive, sustainable growth and development.

We suggest a concerted effort by multilateral agencies such as the World Bank Group and regional multilateral development banks to act as guarantors of restructured debt through guarantee facilities for inclusive, sustainable, and resilient recovery efforts. An example of such a proposal includes the Guarantee Facility for Green and Inclusive Recovery managed by the World Bank⁶. As proposed by the Task Force on Climate, Development and the International Monetary Fund⁷, the IMF is encouraged to play a strategic role through the new Resilience and Sustainability Trust in debt restructuring by providing collateral to guarantee restructured debt. This may be helpful to countries that are not ‘low-income’ in terms of GDP but which may be interested to consider or expand debt restructuring options⁸.

There is mutual interest for both creditors and debtors to enter into restructuring which would free up large-scale resources quickly for climate action and could help demonstrate that credible financial mobilization which goes beyond the $100 billion commitment is entirely possible, something vital to increasing confidence among developing countries for coming forward with new climate ambition.

Debt Sustainability Analyses need to account for climate and other sustainability risks and spending needs for climate action and achieving SDGs

Climate vulnerable countries need comprehensive, enhanced Debt Sustainability Analyses for low-income and middle-income economies conducted by the IMF and the World Bank that integrate climate and other sustainability risks, climate resilience benefits, as well as estimates of a country’s financing needs for climate-change adaptation, mitigation, and achieving the broader goals set out in the 2030 Agenda for Sustainable Development Goals. These risks and spending needs must be included to properly assess a country’s debt sustainability capacity in the face of the climate crisis and to drive investments toward climate resilience.

The debt restructuring framework needs to incorporate adequate incentives to ensure private creditors participate and bear a fair share of the burden

If a country is found to have unsustainable public debt, it should be eligible for debt relief involving both public and private creditors, with equal treatment of public and private creditors. The debt restructuring framework needs to incorporate adequate incentives to ensure that private creditors participate and bear a fair share of the burden. Those countries needing relief would be supported by multilateral agencies through guarantee facilities that would facilitate debt relief negotiations with private creditors. Guarantees on new debt issuance swapped for old and unsustainable debt proved very valuable to bring commercial creditors to come to the table and accept significant debt relief, as was the case with “Brady-bond” restructurings in the late 1980s.

For example, a guarantee facility could provide credit enhancements for new bonds that would be swapped for old debt with a significant haircut. A guarantee facility could ensure that commercial actors (whether bondholders or commercial banks) will receive up to 18 months’ worth of interest payments in the case that the sovereign misses a payment, and provide a guarantee of the value of the new bonds. This can be attractive to the holders of those new bonds, as well as to those that may want to purchase those bonds on secondary markets. Moreover, bondholders and commercial banks can reduce their concentration risk by selling the bonds on secondary markets if they wish. This may not only be attractive to bondholders, but also to commercial banks that have longer term bank loans to distressed countries on their balance sheets. Those loans could be converted with a discount to bonds and then sold in order to reduce concentration risks and help the balance sheets of commercial banks.

Positive incentives for private creditor participation in debt restructuring need to be combined with other measures to ensure that private creditors grant debt relief. If the enhanced Debt Sustainability Analysis asserts that a country’s sovereign debt is of significant concern, the IMF could make its programmes conditional on a restructuring process that includes private creditors. Moreover, the financial authorities of the jurisdictions in which the major private creditors reside should use strong moral suasion and regulations on accounting, banking supervision, and taxation to improve creditors’ willingness to participate in debt restructuring.

Countries develop their own Climate Prosperity Plans to advance development and climate resilient outcomes

Debt relief is more than just a quick fix, it aims to empower governments to invest in strategic areas of development, including health, education, digitisation, cheap and sustainable energy, and climate-resilient infrastructure.

Governments receiving debt relief would develop their own Climate Prosperity Plans to map out the actions they will take to advance their development and climate goals. Natural climate solutions – the protection and enhancement of forests, mangroves and coral reefs – should be a central aspect of adaptation and resilience planning.

Some portion of the restructured repayments would be channelled into a Fund for Green and Inclusive Recovery or an already existing national fund that could be used for this purpose. The government would be free to decide how to spend the money from this Fund, as long as it is demonstrably helping achieve the goals set out in their Climate Prosperity Plan.

Ensuring a fair process through an independent and impartial mediator

In the complex and often conflictive process of debt restructuring, an independent and impartial mediator could help broker good and balanced outcomes. The mediator could be proposed by the UN Secretary-General and agreed upon by the debtor country and a majority of creditors. The mediator would chair the stakeholder hearings regarding the first draft of the Climate Prosperity Plan, broker the conversations on the Climate Prosperity Plan between debtor countries and creditors (including the IMF and the World Bank), and chair the steering committee to supervise the implementation of the Climate Prosperity Plans. On the steering committee, the independent mediator could have a tie-breaking vote.

A credit enhancement for new sustainability-linked debt would smooth re-access to capital markets after restructuring

Countries that have undergone a successful debt restructuring could be eligible to issue new sustainability-linked debt that would be partially guaranteed by the World Bank Guarantee Facility. This would support governments in regaining access to international capital markets and help address their deep-rooted reluctance to restructure unsustainable debt out of fear that a debt restructuring – and the concomitant declaration of a technical default by the rating agencies – would reduce their access to capital markets for extended periods of time. Evidence and ample precedent suggest that a restructuring would improve sovereigns’ balance sheets and medium-term creditworthiness, and therefore allow them to access capital markets in better conditions. In any case, a credit enhancement would facilitate the issuance of new debt.

Debt restructuring should form a core component of a Climate Emergency Pact to be agreed in at COP26 in Glasgow

With a large-scale debt-for-climate swap and guarantees, as we propose here, the whole world benefits. Debtor nations are assisted in both adapting to climate damage and enhancing their own climate resilient and low carbon development, while creditor nations would reduce the level of down-line stranded assets on their books, given debt swaps would render existing investments resilient to climate shocks and the green transition. These creditors would also help raise the global level of mitigation ambition. We believe that debt restructuring should form a core component of a Climate Emergency Pact to be agreed in at COP26 in Glasgow. We all know that nothing can happen unless it is paid for, which is why climate finance has become the key challenge now facing the world.

The technologies – renewables, storage, clean hydrogen and advanced fission – all now exist which will allow the world to rapidly escape from the age of fossil fuels. Whether this can be achieved in time to safeguard the 1.5-degree limit of the Paris Agreement, more than anything else, a question of finance and technology transfer. Can we afford to save our economies? Can we afford not to?


¹ See Volz and Ahmed (2020), Macrofinancial Risks in Climate Vulnerable Developing Countries and the Role of the IMF – Towards a Joint V20-IMF Action Agenda. London, Rotterdam, and Bonn: SOAS Centre for Sustainable Finance, Global Center on Adaptation, and Munich Climate Insurance Initiative.

² See Buhr et al. (2018), Climate Change and the Cost of Capital in Developing Countries. London and Geneva: Imperial College London; SOAS University of London; UN Environment.

³ Volz et al. (2020), Climate Change and Sovereign Risk. London, Tokyo, Singapore, Berkeley: SOAS University of London, Asian Development Bank Institute, World Wide Fund for Nature Singapore, Four Twenty Seven; Cevik and Tovar Jalles (2020), “This Changes Everything: Climate Shocks and Sovereign Bonds”, IMF Working Paper No. 20/79, Washington DC: International Monetary Fund; Beirne et al. (2021), “Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing”, International Review of Economics and Finance, forthcoming.

⁴ See Kling et al. (2021), “The Impact of Climate Vulnerability on Firms’ Cost of Capital and Access to Finance”, World Development, 137, 105131.

⁵ See Munevar, Daniel (2020), “A debt pandemic: Dynamics and implications of the debt crisis of 2020”, European Network on Debt and Development Asbl.

⁶ An example of such a proposal can be found here. See Details of the proposal can be found in Volz, U., Akhtar, S., Gallagher, K., Griffith-Jones, S., Haas, J., and Kraemer, M. (2021), Debt Relief for a Green and Inclusive Recovery: Securing Private-sector Participation and Creating Policy Space for Sustainable Development. Berlin, London, and Boston, MA: Heinrich-Böll-Stiftung; SOAS, University of London; and Boston University; and Volz et al. (2020), Debt Relief for a Green and Inclusive Recovery. Berlin, London, and Boston, MA: Heinrich-Böll-Stiftung; SOAS, University of London; and Boston University.

⁷ The Task Force on Climate, Development and the International Monetary Fund is a consortium of experts from around the world convened to support the Intergovernmental Group of Twenty-Four and the Vulnerable Group of Twenty Ministers of Finance. The Task Force engages in and utilizes rigorous, empirical research to advance IMF policies that align international financial stability and growth with global climate goals. Core to the Task Force’s mission is advancing a development-centered approach to climate change at the IMF.

⁸ Task Force on Climate, Development and the International Monetary Fund (2021), Re-channeling Special Drawing Rights for a Climate Resilient and Just Transition: Prospects for the Resilience and Sustainability Trust.


V20 Statement on Debt Restructuring

Debt Relief for Green and Inclusive Recovery

The Project Debt Relief for Green and Inclusive Recovery was conceived in the summer of 2020 to advance innovative solutions to address the sovereign debt crisis that many countries in the Global South are facing at a time when social progress is under threat and urgent climate action is needed. We are working with thought leaders, civil society and policymakers around the world to develop systemic approaches that help to resolve the debt crisis and advance a just transition to a sustainable, low-carbon economy.

Click here to read our proposal and sign up to our newsletter to stay informed.


Former Maldives President Calls for Debt Restructuring to Fight Against Climate Change

Mohamed Nasheed warns that without restructuring, the island nation can’t afford projects to protect its land and citizens.


“World Economic Forum”-Op-Ed Refers to DRGR

“Five ways to align debt with climate and development goals”: Katie Gallogly-Swan, Rebecca Ray and B. Alexander Simmons from the Boston University Global Development Policy Center published an Op-Ed on the web presence of the “World Economic Forum” quoting the DRGR project. 

News Press

DRGR Ideas See Press Coverage on the Occasion of US President Biden’s Climate Summit

Prior to the virtual meeting of 40 world leaders around Earth Day, the concept of debt relief for a green and inclusive recovery played a prominent role in numerous articles. Still, the White House itself seems to have missed the opportunity to address it appropriately.


Moritz Kraemer Discusses Climate-Driven Credit Rating Downgrades at CNBC

Moritz Kraemer, Senior Advisor to the Debt Relief for a Green and Inclusive Recovery Project and contributor to our report, highlighted that “the vast majority of sovereigns will suffer from climate change in a way that their ratings will be cut.”


New York Times Refers to DRGR in Comprehensive Article on Green Debt Relief

In the midst of the annual Spring Meetings of the International Monetary Fund and the World Bank Group, the NY Times published an article on the “systemic risk” debt and climate change pose on the world economy, quoting the DRGR proposal.


DRGR-Idea Reaches Central Players: IMF and World Bank To Present ‘Green Debt Swaps’ Option by November

As reported by Reuters, IMF Managing Director Kristalina Georgieva said “green debt swaps have the potential to spur accelerated action on climate change in developing countries”, announcing appropriate instruments by November.


“Nature” Finds “Climate Change Imperils Countries’ Ability to Repay”

“Nature”, a weekly international journal distributing peer-reviewed research, published an analysis that warns against the risks of a severe debt crisis if climate change is not taken into account when governments lend money during the pandemic. The text suggests three steps that match the DRGR proposal.