Event Summary - From Theory to Market: State Contingent Debt Instruments (SCDIs)

On October 6, the Bretton Woods Committee hosted a roundtable at the International Monetary Fund on the feasibility of a real market for state-contingent debt instruments (SCDIs). The event – moderated by Bretton Woods Committee Advisory Council member Bill Rhodes – brought together a group of 40 sovereign (issuers) and market participants (investors) to advise the IMF as they deliberate proposals for the G20 on SCDIs.

The premise behind SCDIs is to tie a sovereign’s payment obligations to its repayment capacity. Thus, the debt service burden on these instruments would fall in a downturn, providing countercyclical policy space and helping to reduce the likelihood/severity of sovereign debt crises. The instruments may carry yield prospects for international investors (in the current low interest rate environment), and the potential for enhanced risk-sharing and diversification, both between the public and private sectors, and internationally.

Despite their analytical appeal, however, the take-up of SCDIs has been low, with issuance mostly limited to debt restructuring contexts (e.g. GDP warrants, hurricane clauses). Limited take-up partly reflects the liquidity/novelty premia demanded on new instruments, but also deeper data integrity, first-issuer moral hazard, and political economy and transition issues. Discussion at the Bretton Woods Committee SCDI roundtable focused on these barriers that need to be surmounted in order to kickstart a market and assessed the operational viability of such instruments (primarily GDP-linked bonds).

Resources

International Monetary Fund Presentation

Bank of England Presentation

London Term Sheet and Supporting Materials

Article: The Banker, GDP-linked bonds: from concept to reality?