G20 plan to stave off
debt crises stalls as no country takes lead
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[March 10, 2017]
By John Geddie
LONDON
(Reuters) - Global efforts to create a market for growth-linked bonds
that could help avert debt crises have stalled because none of the
wealthy economies backing the drive are willing to take the lead and be
the first to issue, sources told Reuters.
Growth-linked, or GDP-linked, sovereign bonds allow a country's
repayments to fluctuate depending on its level of economic growth or
contraction - meaning, for example, a government would pay less if its
revenues were hit by recession.
Policymakers for the Group of 20 major world economies last year agreed
on an initiative to create a market for the bonds. They commissioned an
International Monetary Fund report into such debt, which could offer
poorer economies some respite if they fell on hard times and stave off
the kind of defaults seen recently in the likes of Puerto Rico and
Ukraine.
The G20's technical staff were briefed earlier this year on the IMF
findings, which they will feed back to finance ministers and central
bank governors before their G20 meeting in Germany on March 17-18.
They were told that the main obstacles to the project was a lack of
investor demand and the stigma attached to such instruments, according
to two sources close to the discussions. These kind of bonds have so far
only emerged from debt restructurings as a way to coax creditors to
accept writedowns.
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One plan mooted by the G20 last year was to have advanced economies
issue first to make investors more comfortable with the bonds. But this
has hit the buffers for the moment because no country wants to take the
risk of being the first to issue the bonds, according to the sources.
'NO BIG BANG'
"The technical discussions have suggested no big bang issuance is
expected as of now or coordinated issuance that was initially thought
may be possible," said one of the sources who declined to be named as
the discussions were private.
"It was more a recognition of the work that was done, a sharper
understanding of the key impediments and a possible way forward. There
is a little more work to be done before these things take off."
The IMF's report on state-contingent debt, which includes GDP-linked
bonds, is due to be published in late April.
The second source familiar with the discussions added that deep
scepticism about growth-linked debt within Germany, the hosts of this
year's G20, was also an impediment.
Many in Germany fear Berlin would need to pay too much of a premium to
coax traditional investors in bonds, seen as a safer store of cash than
stocks, to expose themselves to the potential downsides of growth-linked
debt, the source said.
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![](../images/031017pics/busine59.jpg)
Flags of G20 countries are seen outside the G20 venue before the
start of the G20 Summit of major world economies in Cannes November
3, 2011. REUTERS/Dylan Martinez
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Rafael
Molina of Newstate Partners, an advisory firm that collaborated with the IMF on
its report by canvassing a broad range of market participants including
investors and possible issuers, said: "The feedback has shown that people are
intrigued but they want to see the benefits and how it will come out.
"There are many concerns and many questions that have to be addressed before
growth-linked bonds develop in a way that a market can be created for it."
FIRST MOVER
Argentina, which takes over the G20 presidency next year, offered investors
growth-linked warrants during debt restructurings in 2005 and 2010 but they cost
the treasury billions of dollars as the economy recovered.
And while the Bank of England has steered a market group to develop a legal
framework for growth-linked bonds, uncertainty over Britain's economic
trajectory as it leaves the European Union makes it an unlikely proving ground
for these bonds.
In a
paper last month, think tank CIGI said the United States would be the best place
to kickstart this project. However, if promoting a market more beneficial to
others comes at a cost to the U.S. economy, it may jar with President Donald
Trump's "America First" mantra, the sources said.
France, which on Friday hosts a workshop on GDP-linked securities, was the first
euro zone country to sell bonds linked to inflation, and one of the first to
launch "green" debt earmarked for environmental projects.
But a French government official, who declined to be named as they are not
authorized to speak publicly, cautioned that upcoming presidential and
parliamentary elections in France and the transition to a new leadership meant
that any potential issue of growth-linked debt would not be around the corner.
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History has shown that the development of a sizeable market for this type of
instrument may take decades.
Britain was the first industrialized country to sell inflation-linked bonds in
the early 1980s, but it was not until the United States and France joined the
market in the late 1990s that it began to gain scale. Germany only joined in
2006.
(Editing by Pravin Char)
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