official bilateral creditors provide a feasible source of debt relief and for SIDS with higher levels of debt, debts to official bilateral creditors comprise only 12 percent of total public debt on average. Moreover, the bilateral creditors may be reluctant to provide debt relief if no other category of creditor is doing so. For these reasons, efforts to secure debt alleviation on existing debts are unlikely to be feasible or generate significant amounts of debt alleviation for most SIDS, and especially for those with higher levels of debt.<sup>30</sup> In addition to the practical difficulties of securing tangible debt relief from multiple creditors with different commercial and institutional objectives, efforts by SIDS governments to campaign for debt relief could undermine their own perceived creditworthiness on credit markets and thereby raise the risk premiums that they have to pay to mobilize commercial debt. As such, campaigns for generalized debt relief by countries whose public debt is sustainable could actually worsen fiscal space, by raising borrowing costs on new debt while failing to obtain any relief on existing debt.

Given that the DSAs identify vulnerability to exogenous shocks as posing a major threat of debt distress in many SIDS, the insertion of pause clauses into debt contracts might be valuable for SIDS. The World Bank’s Climate Resilient Debt Clause (CRDC) is an example of such a clause. This offers eligible debtors of the World Bank, including the SIDS and other small state economies, the option of deferring scheduled principal and/or interest payments on IBRD and IDA credits for up to two years, in the event of their being struck by a natural disaster which exceeds pre-defined trigger thresholds. The fee charged to the borrower to include the CRDC in a debt contract is five basis points per annum of the disbursed and outstanding loan amount.

# **7. Conclusions and Main Messages**

Most SIDS are vulnerable to climate induced disasters, especially tropical cyclones, and are highly exposed to major losses and damages from such disasters because of the small size of their territory and of their geographic location. The EM-DAT database records 185 episodes of tropical cyclone disasters among Caribbean SIDS and 74 among SIDS in Oceania from 1995 to 2022. These disasters caused USD 45 billion in damages in the Caribbean and USD 2 billion in Oceania (in 2022 prices). These figures are almost certainly underestimates because there are no recorded damages in the database for some large disasters. In 22 of the tropical cyclone disasters, recorded damages exceeded 10 percent of GDP: for three of these disasters, the damages exceeded 100 percent of GDP and for a further five, damages were between 50 percent

> 30 The practical difficulties of implementing effective debt alleviation measures are illustrated by the experience of Jamaica (Schmid, 2016). With public debt to GDP of 140 percent in 2010, Jamaica undertook two programs of debt restructuring, in 2010 and 2013, but neither reduced the debt burden significantly. There were two reasons for this. First, the debt restructurings were restricted to domestic government securities, which comprised around 55 percent of the public debt stock in January 2010, but omitted external bonds held by international investors which comprised almost 30 percent of the debt stock. The latter were omitted because the bonds lacked collective action clauses which could have allowed a haircut to be imposed on all bondholders without costly and time consuming legal disputes with individual bond holders. Second, the amount of debt relief which the restructuring of domestic government securities provided was relatively small – it was limited to a reduction in the interest rate and an extension of maturities – but did not involve a write down in the nominal value of the debt (although there was a significant reduction in the PV of the debt) because that would have risked financial fragility among domestic financial institutions – banks, broker dealers and insurance companies – which held the securities. On average, the holdings of government securities by domestic commercial banks amounted to 112 percent of their capital in 2010, so any substantial write down of the face value of the debt would have depleted the banks’ capital.

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