Key Takeaways:
A proposal to let shock-prone emerging markets pause debt payments would raise borrowing costs and fail to address the root causes of sovereign defaults, according to the head of global sovereign debt at Barings.
A group of bondholders known as the London Coalition met in Washington last week to present a plan allowing select emerging-market countries to suspend external debt payments for one year during crises. The proposal argues that revised bond contracts with enhanced transparency clauses would prevent borrowing costs from rising.
"The proposal means well, but it could do more harm than good," said Cem Karacadag, head of global sovereign debt and currencies at Barings, which manages about $434 billion in assets. "Debt pause clauses don't belong in the tool kit, period. They will increase borrowing costs for the countries that adopt them because creditors will seek compensation for accepting a higher risk of not receiving coupon payments."
None of the sovereign defaults over the past decade — among them Argentina, Ecuador, Ghana, Lebanon, Sri Lanka and Venezuela — would have been averted by a debt pause, Karacadag wrote in a commentary published by Barron's. Years of economic mismanagement was to blame in each case, he said, arguing that sovereign creditworthiness is a multidimensional problem that cannot be solved with quick fixes.
The proposal's core flaw is that it treats liquidity as a function of cash management rather than market access, Karacadag said. "Any sovereign that cares about its reputation shouldn't risk its creditworthiness for a temporary suspension of debt service," he wrote. "Its future access to markets, and therefore to liquidity, will be harder and costlier in the long run."
The London Coalition's proposal singles out low-income and lower-middle-income island nations for special treatment, regardless of their actual fiscal health. Karacadag pointed to Jamaica as a counterexample: when Hurricane Melissa struck in 2025, inflicting $8.8 billion in damage — 41% of the island's annual gross domestic product — Jamaica's sovereign dollar bond spreads remained at their lowest levels ever.
Jamaica achieved that resilience through more than a decade of sizable primary fiscal surpluses, halving its government debt-to-GDP ratio to 62% in 2024 from 140% in 2012. The government created enough fiscal space to cope with the disaster, mobilize financing and rebuild without missing a debt payment.
The proposal also overstates the value of enhanced transparency clauses, Karacadag said, noting that most emerging markets already subscribe to the International Monetary Fund's data standards and regularly release macroeconomic, fiscal and debt data. "If bondholders are going to legislate good borrower behavior via debt contracts, why stop at transparency?" he wrote. "Why not include fiscal and debt rules or floors on foreign exchange reserves?"
The debate over debt pause clauses comes as developing nations face mounting pressure from higher global interest rates and a stronger dollar. The last time a similar debt restructuring mechanism was widely discussed — during the 2020 G20 Common Framework for debt treatment — only three countries (Chad, Ethiopia and Zambia) completed restructurings, with an average processing time of more than 18 months, according to the IMF.
This article is for informational purposes only and does not constitute investment advice.
