TF9 International Finance


Throughout 2020, the Covid-19 pandemic caused massive human and economic casualties.
The pandemic has been a major blow for developing countries, especially low-income countries, from many perspectives. These countries experienced a sudden dry-up of external financing in March 2020, against the backdrop of a rapid pile-up of sovereign debt during the last few years, coupled with a surging need for finance to combat the public health crisis (Figure 1). In this context, the international community tried to mobilise financial resources as quickly as possible to ease liquidity constraints facing these countries. Alongside exceptionally quick financial assistance from the International Monetary Fund (IMF) and Multilateral Development Banks (MDBs), the G20 countries agreed on a temporary debt moratorium in April 2020, the so-called G20 Debt Service Suspension Initiative (DSSI). This initiative has allowed eligible countries to delay debt-service-related payments owed to bilateral official creditors. Since its inception, it has been extended twice and it should now expire in December 2021.

In addition, the anticipated reflation cycle in the United States led to an increase in US Treasury yields in March. The prospect of tightening global financing conditions could slow down capital flows into the emerging world or even lead to capital reversals. Moreover, the slow vaccine rollout in the emerging world and the renewed lockdowns in some of those economies may also disrupt economic recovery. Against this backdrop, emerging and developing countries need to swiftly address a two-pronged policy objective: sovereign debt sustainability and being able to fund investment, especially investment with high economic and social returns. So far, the international community – through the G20 in particular – has alleviated the liquidity strain facing developing countries with the DSSI and a quick mobilisation of financial resources by the Bretton Woods institutions. With the DSSI coming to an end in 2021 and the scepticism about the readiness of the Common Framework for Debt Treatment, additional and holistic solutions need to be developed. Otherwise, not only will a handful of low-income countries face liquidity constraints or even solvency challenges, but such circumstances could also quickly extend to middle-income countries. This is even more likely if the cost of funding were to shoot up amid looming concerns about a taper tantrum 2.0. Besides problems with new financing, solidarity and continuous efforts are needed from different creditors – multilateral institutions, public sector and private sector creditors –to deal with the legacy of the high stock of debt accumulated.

With both new financing and legacy debt issues in mind, we put forward a proposal of setting up a World Recovery Fund (WRF), aimed at addressing some of the key problems with the design of the DSSI and more generally the existing international financial architecture for dealing with debt problems in the developing world. We first describe the main challenges in the international financial architecture for post-pandemic sovereign financing, and then detail our proposal for the WRF.


Alicia García Herrero
Bruegel, Hong Kong University of Science and Technology, and NATIXIS