Major bond investors, including Abrdn and T. Rowe Price, have proposed incorporating clauses into sovereign bond agreements that would permit emerging market countries to suspend debt repayments for up to one year during a crisis without triggering a default.
The proposal was put forward by the Bondholder Working Group, a commercial creditor subgroup under the UK-supported London Sustainable Sovereign Debt Alliance. Its objective is to assist nations in managing short-term liquidity shortages while preserving their access to market financing.
This initiative emerges as developing nations express growing frustration over repeated external shocks, such as war-induced energy price surges and natural disasters, which have severely impacted their economies.
Samy Muaddi, Head of Emerging Markets Fixed Income at T. Rowe Price, stated, "This is a bondholder-led initiative developed through a consultative process with issuers and other stakeholders. Because of this, it is commercially viable and more likely to be effective for both investors and developing countries."
Muaddi added, "Some critics argue the proposal does too little... others believe it goes too far."
According to the proposal, which would not apply to countries already in default or with unsustainable debt levels, a nation could suspend repayments by declaring a state of emergency or by seeking emergency financing from the International Monetary Fund (IMF).
This would require providing bondholders with 30 days' notice and ensuring that at least 60% of other external creditors participate in similar relief measures.
A second, faster response option could be activated if a disaster causes damages certified by the World Bank to exceed 15% of the country's GDP.
The Bondholder Working Group stated, "Implementing these clauses can establish a more coherent and predictable crisis response mechanism... and ultimately support a more stable and efficient market, benefiting both issuers and investors."
The proposal envisages embedding such clauses into future bond contracts and includes safeguards for investors: if conditions related to transparency and fair creditor participation are not met, bondholders representing at least 50% of eligible debt could veto a request for a payment suspension.
Abebe Selassie, Director of the IMF's African Department, emphasized that such measures have the potential to complement existing crisis response frameworks.
He stated, "We are very willing... to try and provide our views on situations where countries are facing shocks and specific debt payments are particularly burdensome."
Previous efforts to include crisis response clauses in sovereign debt have encountered resistance from private creditors, who raised concerns about enforceability and moral hazard.
While countries like Grenada and Barbados have incorporated such clauses, they have not yet become a widespread standard in international markets.
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