An Updated Bridge Proposal:
Towards A Solution to the Current Sovereign Debt Crises and to Restore Growth
BY Ishac Diwan, Martin Guzman, Martin Kessler, Vera Songwe, and Joseph E. Stiglitz.
The Finance for Development Lab (FDL) and Columbia University’s Initiative for Policy Dialogue (IPD) are proud to announce the publication of a pioneering paper titled "An Updated Bridge Proposal: Towards A Solution to the Current Sovereign Debt Crises and to Restore Growth".
It was launched on Tuesday 23rd July in Addis Ababa during the Preparatory Committee for the Fourth International Conference on Financing for Development (FfD). Link to the Paper
“The world stands on the brink of a debt crisis for many, many countries—hit first by the pandemic, then by inflation with soaring food and energy prices, and now by an unprecedented rapid increase in global interest rates. For the sake of the hundreds of millions living in these countries, for the sake of global solidarity so needed in our common struggle against climate change, we must find an alternative to the approaches of the past, which entailed austerity and immiseration. We provide a way forward, entailing cooperation between the private sector, multilateral institutions, and governments, in which all benefit. But it will require the private sector to put aside its short sighted greed, and creditors and debtors working together for the long run interests of all.”
Joseph E. Stiglitz, Co-President, Columbia University’s Initiative for Policy Dialogue & University Professor and co-author of the paper.
“Anxiety in countries suffering debt crises is immense. No resolution of those crises means no hope. We propose a path forward that would enable economic recovery and sustainable development, in which multilateral institutions recover or strengthen the role they should play, private and official bilateral creditors wait to get their capital back and are rewarded a sustainable interest rate for the time, and countries put in place programs that serve their people: A win-win-win with respect to any alternative counterfactual.”
Martin Guzman, Co-President, Columbia University’s Initiative for Policy Dialogue (IPD), University Professor, and Former Minister of Economy of the Argentine Republic.
“The right diagnosis is always 60 percent of the solution. We propose a solution in this paper which puts liquidity and growth at the center of the discussion and effective simultaneous coordination of relief as the key pathway. However, no solution will be credible without clear evidence that countries will have access to sufficient new capital and the fiscal space to create jobs and address the climate challenge. The Bridge Proposal offers such a solution”
Vera Songwe, Founder and Chair of Liquidity and Sustainability Facility (LSF) and co-author of the paper.
"We believe that the proposals laid out in this paper have the potential to reshape the discourse around capital flows and debt sustainability in developing economies. Our primary focus now is to progress from concept to actionable blueprints that can be tailored to individual countries"
Ishac Diwan, Research Director of the Finance for Development Lab and co-author of the paper.
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VIEW THE RECORDING OF THE LAUNCH CONFERENCE IN ADDIS ABABA ON 23RD JULY 2024:
At a time when many developing countries are grappling with liquidity and sustainability crises, the global community is actively seeking effective measures to support their economic stability and progress towards sustainable development goals. Highlighting the link between climate change and the escalating debt crisis in developing nations, the paper emphasizes the urgent need for a comprehensive solution to tackle these interrelated challenges.
A significant portion of the financing from international finance institutions is being absorbed by debt repayments rather than reaching the intended recipients. In other words, the global community is currently funding loans to developing countries which end up “leaking out” to pay off other creditors. While some developing countries need to decrease their debt levels, around 20 to 30 countries have the potential to overcome their debt issues by growing their economies, provided they can secure financing at reasonable rates. Addressing this issue is crucial as it directly impacts the economic stability and prosperity of these countries, as well as their ability to provide essential services and support to their citizens.
Many countries have accumulated unsustainable levels of debt that need to be restructured. Despite some progress in resolving debt issues through the "G20 Common Framework," the barriers to default are still too high, and the resulting debt reduction is too low. To encourage the private sector's involvement in resolving these issues, changes to the laws that affect bondholders' incentives to cooperate will be necessary. This is especially true in major jurisdictions for sovereign bond issuances, such as New York and the UK.
Introducing a pioneering new strategy, the FDL/IPD paper builds on an evolved version of the ”Bridge Proposal” issued by FDL in 2023. Recognizing that not all countries have the same level of debt problems and that a one-size-fits-all approach may not be effective, this proposed strategy seeks to support countries through temporary extensions of maturities for countries facing liquidity problems. In the aggregate, the main benefit is that such a targeted approach avoids future systemic debt crises and supports sustainable development and the climate transition.
The FDL/IPD paper presents a groundbreaking contribution to addressing the debt and sustainability crises in frontier economies, offering innovative solutions to complex challenges faced by developing nations.
Upcoming international meetings, such as the G20, will provide opportunities to move into the proposal’s implementation phase. As highlighted in the newly released paper, the success of the Bridge Proposal hinges on four key pillars: the development of country-led, multi-year programs for stabilization, recovery, and green growth; enhanced coordination between the World Bank and the IMF; support by bilateral lenders in the form of debt restructuring; and a revision of creditors' incentives to participate in debt operations.