Bond investors propose crisis ‘pause clauses’ for emerging countries

By Colleen Goko

JOHANNESBURG, April 20 (Reuters) – Major bond investors including Amundi and T. Rowe Price have proposed adding clauses to sovereign bonds that would allow emerging countries to pause debt payments for up to a year without defaulting in the event of a crisis.

The plan from the Bondholder Working Group, a subgroup of commercial creditors of the British-backed London Coalition on Sustainable Sovereign Debt, aims to help countries grappling with short-term cash crunches, while maintaining market access.

The proposal comes amid frustration among developing nations that have faced repeated external shocks, from war‑driven energy spikes to climate disasters, which have hit their economies.

“This is a bondholder‑led initiative, developed through a consultative process with issuers and other stakeholders, which is precisely why it is commercially viable and more likely to work for both investors and developing countries,” said Samy Muaddi, head of Emerging Markets Fixed Income at T. Rowe Price.

“Some critics think the proposal does too little… Other critics argue it goes too far,” Muaddi added.

Under the proposal, which excludes nations already in default or facing unsustainable debt levels, countries could suspend payments either by declaring a national emergency or seeking emergency International Monetary Fund financing.

This would also require 30 days’ notice to bondholders and participation from at least 60% of other external creditors in similar relief measures.

A second, expedited option activates if a disaster causes damage exceeding 15% of GDP, as certified by the World Bank.

“Implementing these features could establish more coherent and predictable crisis response… and ultimately support more stable and efficient markets that benefit both issuers and investors,” the Bondholder Working Group said.

The proposal foresees the clauses to be embedded in contracts of future bonds and includes safeguards for investors, allowing bondholders with at least 50% of eligible holdings to block a pause if conditions, such as transparency or equitable creditor participation, are not met.

Abebe Selassie, director of the IMF’s African Department, highlighted the potential for such measures to complement existing crisis response mechanisms.

“We’d be very happy to … try and provide our thoughts, (on) the individual country cases where when shocks are hit, where particular payments could be onerous,” he told Reuters.

Previous efforts to embed crisis-responsive clauses into sovereign debt have met resistance from private creditors over enforceability and moral hazard concerns.

Grenada and Barbados introduced such clauses, but these have not become standard in international markets.

(Reporting by Colleen Goko; Editing by Karin Strohecker and Alexander Smith)