A senior banker at Citigroup Inc. said lenders need to accept so-called pause clauses to let struggling sovereign borrowers temporarily halt debt payments if they’re hit by a catastrophe.
Such debt clauses are “not only reasonable, but they’re necessary,” Jay Collins, vice chairman of Citi’s banking, capital markets and advisory division, told Bloomberg on the sidelines of the New Global Financing Pact Summit in Paris. “They should become mainstream,” he said.
The comments follow an announcement by World Bank Group President Ajay Banga, who said earlier in the week that the development lender will permit disaster-hit countries to pause their debt repayments. The move expands the toolkit being used to help the most vulnerable nations prepare for and respond to crises, and comes as the so-called Global South urges rich lenders to step up before time runs out.
The World Bank and other multilateral organizations are intensifying calls on private lenders to contribute more. In an interview with Bloomberg Television on Thursday, Banga said there’s “no way there’s adequate money” to address the current challenges and “intertwining crises” without private-sector finance.
Collins said his bank already has some experience with such debt arrangements. “In the US, Citi has been doing extensions for municipals that would allow a state to extend” the maturity of its debt, he said. “At a price, we’ve already seen those used, and they just need to be perfected.”
To get private finance more involved, multilateral development banks (MDBs) need to do more to help address the complexities and risks that the finance industry faces, Collins said.
For now, MDBs aren’t necessarily “fine-tuned to meet the regulatory constraints of banks and insurance companies,” he said. Private banks want assurances that MDBs will do more to help shoulder or reduce some of the risks involved, he said.
That includes areas such as “guarantees, political risk insurance, breach of contract protection,” he said. Private sector finance would also want to be able to consider “new A, B loans, B bonds, junior positions, mezzanines, more structures” that are “fine-tuned to take currency risk, to take duration risk,” Collins said.
The goal should be “to take out the pain points that create the most risk in any given structure,” he said. “That’s what’s necessary to have a four to five times the mobilization rate.”
In a recent post on his LinkedIn page, Collins said it’s time to “mandate” development banks to measure, target and deliver ambitious private capital mobilization rates.
“The financing needs for sustainability and climate are so far beyond the reach of the public sector and the official development community that private capital mobilization must now finally be made a core development requirement,” he said.
Importantly, MDBs have already gathered the relevant data for private banks to use in their efforts to gauge the risk of entering financing agreements with emerging market borrowers, Collins said. And that’s “absolutely critical,” he said, referring to a new version of the Global Emerging Markets Risk Database.
“The MDBs have been sitting on emerging market data that is very specific to how banks measure risk,” Collins said. “We have to have the historical data” and that will now be made available to the private sector for the first time, he said.
“It’s critical, because it’s essentially warehousing a massive amount of historical ESG, sustainability, developmental loan data about the risks by which a bank can internalize that data and then adjust its risk metrics according to that,” he said.
Bloomberg Philanthropies is one of the official sponsors of the Summit for a New Global Financing Pact.
(Adds reference to LinkedIn post on MDBs in 10th paragraph.)