Climate Resilient Debt Clauses: good or bad for the Global South?

When a country is hit by a catastrophic external shock, like climate extreme events, there is currently no comprehensive and consistently applied method of suspending debt payments. This means that in most cases, countries continue paying their debt when a climate extreme event – like a hurricane or flood – strikes, diverting vital resources away from the emergency response and reconstruction. 

Climate resilient debt clauses (CRDCs) are being proposed as a tool for addressing this. But are they an adequate solution? 

What are Climate Resilient Debt Clauses? 

Climate Resilient Debt Clauses (CRDCs) are clauses that can be added to individual loan contracts that allow countries to temporarily suspend debt payments for an agreed period of time (typically up to two years) in the aftermath of a climate extreme event. 

Some lenders have announced they will offer to include these clauses in loan contracts (such as UK Export Finance, the Canadian government, the World Bank, and the African Development Bank), but this will often come with borrowers having to pay a fee in return. The International Capital Market Association (the institution that sets rules for the bond market) also announced that lower income countries would be able to include clauses in loans in their external bonds.  

Adding CRDCs to loan contracts is currently voluntary. In 2023, UK Export Finance reached an agreement to include CRDCs in new and existing loan contracts with Guyana and Senegal, but it is unclear if other lenders have started to include them in loan contracts yet. 

CRDCs could be helpful in preventing future crisis 

CRDCs could help prevent future debt crises as they will ensure financial resources stay in a country in the aftermath of a shock (as opposed to leaving through debt repayments). We understand that leaving the financial resources available in the country on the ground is simply the easiest, fastest and most reliable way to provide support for emergency relief and the first efforts towards reconstruction. However, all that CRDCs do is suspend debt payments, to be repaid in the future, with additional interest. 

Key issues to make CRDCs work better include that they: 

  • they are actually triggered when a climate-extreme event takes place (previous schemes based on shocks and disasters have not always been realistic, so have not triggered when a catastrophe has occurred)  
  • other shocks are also factored in (such as geological events, health pandemics or other external shocks) 
  • they are included in all debt contracts across all external creditors (private, multilateral and bilateral) to ensure comparability of treatment across creditors (i.e. avoiding the incidence where one creditor agrees to suspend debt payments but another doesn’t, so the freed up resources from one creditor are then used to repay another).  
  • they are retrospectively added to existing contracts  
  • interest does not keep accruing while the debt payments are paused (in all current proposals it does) 
  • they do not create additional costs of lending for lower income countries (i.e. their loans don’t get more expensive). If these costs are forced onto global south countries, it constitutes a financial punishment for their climate vulnerability.  

CRDCs are not enough on their own 

All current CRDCs do is move debt payments into the future, with additional interest. This means that when the debt repayments resume, countries may find themselves unable to pay, or only able to do so by cutting vital public spending. We therefore need functioning and effective debt relief processes as well – CRDCs are not a replacement for debt relief.  

When a climate-extreme event such as a tropical storm takes place that significantly worsens a country’s economic outlook, we are calling for an immediate, interest-free suspension of all debt payments from that country across all external creditors. This must go alongside additional, grant-based financing for addressing Loss and Damage. After a period of assessing the impacts of the shock, a debt sustainability analysis should be conducted, considering the losses and damages and the financing needs for recovery and reconstruction, followed by a debt restructuring, including cancellation if needed, across all creditors. 

CRDCs are not a solution to the current debt crisis 

CRDCs do nothing to help with current debt crises many lower income countries are experiencing. As such, they should be seen as a complement to creating the effective debt relief systems needed now rather than an alternative.  

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