Finance Day Debt sustainability

	Question	Answer	Validation timestamp
1	What factors are worsening the state of debt distress for many countries?	Interest rates have risen, the US dollar (in which most debts are denominated) has appreciated, and growth has slowed.[1]
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2	What is an example of a country having liquidity issues?	Benin faces sharply higher repayments on its Eurobonds in 2023 and 2024, which it might find expensive to roll over given current market conditions. Benin’s debt management issue stems from ensuring adequate liquidity despite the uncertainties in global capital markets.[2]
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3	What is debt overhang?	Many countries are finding it difficult to find the fiscal space for high-return mitigation, adaptation and resilience projects. The debt overhang problem is about microeconomics – how to finance good projects when existing levels of debt are too high for new creditors to voluntarily provide new money. [3]
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4	What causes liquidity problems to arise?	Liquidity problems emerge when the structure of debt service payments is lumpy, as in the case of the Benin Eurobond example mentioned above, or when the economy suffers an external shock. Liquidity problems can be exacerbated when countries rely excessively on private capital markets, particularly sovereign bond markets, which has less favourable features.[4]
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5	What is the state of global indebtedness in emerging economies?	One-third of all developing countries and two-thirds of low-income countries are at high risk of debt distress.[5]
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6	How has the creditworthiness of countries changed over the past few years?	Credit rating agencies have been systematically lowering their assessments of sovereign creditworthiness since the onset of the pandemic. Few countries are now classified as having an ‘investment grade’ rating.[6]
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7	What is partly responsible for the general lowering of global sovereign credit ratings?	An IMF study found a negative, significant effect of climate vulnerability on creditworthiness. Ratings agencies are realising that climate risks are no longer something that will affect the future but are part of the assessment of creditworthiness in the here-and-now.[7]
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8	How can climate disasters lead to debt for countries?	Studies have shown that borrowing to smooth out the cost of a natural disaster over time can result in a cycle of debt accumulation if the frequency and impact of shocks goes up – this phenomenon largely explains the indebtedness of many Caribbean countries.[8]
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9	What is leading to the debt issue in EMDCs?	For emerging markets and developing countries (EMDCs) the debt issue is primarily one of liquidity and roll-over problems.[9]
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10	Is there good news for EMDCs?	Yes, the IMF projects that growth in the next five years will be higher and more evenly distributed than in the five years preceding the pandemic. [10]
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11	What issues need to be managed to tackle debt difficulties?	• The growing risk of a liquidity problem in many countries.[11] • The debt-overhang problem in a small set of countries • The debt-as-insurance problem in climate-vulnerable countries that leads to a vicious cycle of climate and debt vulnerability.[12]
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12	What could accelerate economic growth for EMDCs?	Higher and better-quality public spending. Also, if finance is made available on terms that non-concessional official lenders offer, then most countries should be able to grow out of their debt difficulties.[13]
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13	What are some priorities for managing liquidity risk?	• Creating easier access on reasonable terms to official liquidity facilities, without penalty surcharges • Placing more reliance on official finance where longer maturities and grace periods reduce lumpiness in repayment schedules.[14]
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14	What is the big push strategy?	It is a strategy that represents a trade-off between taking on more debt for the right kind of investments - those that invest more in climate change mitigation, adaptation, and land-use and nature-based solutions . [15]
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15	What are the conditions required for the big push to work?	The strategy relies on sound public investment management. More borrowing may cause credit ratings to drop in the short term, but if project returns are higher than the cost of finance, creditworthiness will generally improve under a big push strategy compared with the current business-as-usual strategy. In the big push, there is an improvement in creditworthiness from higher income levels and growth that more than offset the decline in creditworthiness caused by higher debt levels and fiscal deficits.[16]
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16	Can the big push strategy work under current conditions?	Not really, a few reforms need to be made to international finance architecture: • First, there must be an improvement in the provision of liquidity in the event of economic downturns or natural disasters. • Second, new borrowing must be on affordable terms, best intermediated through multilateral and bilateral official financial institutions. • Third, provision must be made for global solidarity to share the costs of climate-related disasters when they strike small countries that are especially vulnerable.[17]
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