WASHINGTON/LONDON : The recent cascade of countries defaulting on their debt has brought back into vogue complex securities - born in the 1980s - that aim to speed up restructurings.
The renaissance of so-called State Contingent Debt Instruments, which lure investors with new bonds that promise payouts if the country hits certain economic or fiscal targets, has helped countries from Ukraine to Sri Lanka resolve difficult debt negotiations.
Privately, other debt experts worry that their use could boost borrowing costs down the line by making some investors reluctant to buy the bonds when they later trade on the market. Future debt strains could be trickier to navigate, they warn.Authorities in Ukraine, Zambia, Sri Lanka and Suriname did not immediately respond to a request for comment.
Economic growth is a common metric, though SCDI payouts can also be linked to revenue stemming from natural resources or tax receipts. "The only way for investors to get some recovery is through these contingent instruments, but it's not necessarily the best way to proceed in my view, because it's very complicated," Strigo said.
Experts say those designing new instruments also focus on making sure they are eligible for benchmarks, such as JPMorgan's widely followed Emerging Market Bond Index . This is key to keeping investors interested in buying the instruments – and thus government debt costs down.Still, SCDIs come at"a price" for borrowers, said Stefan Weiler, head of CEEMEA debt at JPMorgan, one of the banks on Ukraine debt sales.
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