Avinash Persaud makes a persuasive case for developing countries to follow Barbados in issuing sovereign debt with natural disaster clauses (Opinion, June 28). In the event of a natural disaster, the interest payments on such loans are immediately suspended and added to the principal at the end of the term. Essentially these clauses equip countries struck by a natural disaster — or even a pandemic — with the liquidity that is necessary to respond to the crisis.
Unlike the Debt Service Suspension Initiative (DSSI) that the G20 rashly implemented at the height of the Covid-19 crisis, the Barbadian measure is forward-looking and pre-empts a liquidity crunch and a debt crisis when a country is hit by a natural disaster. It is an innovative measure that should help countries effectively manage their debt and strengthen resilience in light of foreseeable but unpredictable events.
Experience so far shows that the premium on bonds with natural disaster clauses is negligible and so these instruments are cheaper than insurance contracts — hence the suggestion to adjust the interest rate when the debtor makes the payment at a later stage.
We are, however, sceptical on whether the G20 countries can commit to Professor Persaud’s proposal, as suggested. Where would the line be drawn between developing countries that are allowed to use the natural disaster clauses and those that are not? And assuming that the G20 can work out a system to deal with natural disasters and debt exposure, would bond markets be willing to absorb such a risk without increasing the premium? What works for a small and vulnerable country may not be scalable to a group of developing countries.
Professor Rodrigo Olivares-Caminal
Professor Paola Subacchi
Queen Mary University of London
London E1, UK
