Read the detailed instrument sheet by clicking on the link below.
Overview
Clauses in debt contracts that pause payments for 1–2 years after disasters, providing liquidity without default or downgrade.
Risks addressed
Credit risk
Liquidity risk
Applications
- Best for climate-vulnerable sovereigns (SIDS, EMDEs).
- Fiscal space for health, infrastructure, agriculture, energy, disaster response.
- Most effective as part of broader disaster risk financing strategies.
Type of instruments and providers
- Commercial: Investment banks and legal advisors; insurers and risk pools
- Concessional/public: MDBs; bilateral creditors; climate funds.
- Technical assistance: MDBs, ICMA.
Debt sustainability
- Temporary repayment pause reduces short-term pressure and preserves credit ratings.
- Avoids costly emergency borrowing and protects development spending.
Internal capacity requirements
| Minimum | Advanced | Pathway |
| Legal authority, debt management capacity, disaster monitoring. | Portfolio integration, parametric triggers, central bank coordination. | MDB pilots → portfolio expansion → advanced systems. |
Regulatory capacity requirements
| Minimum | Advanced | Pathway |
| Approval authority, MoF and central bank coordination. | Governance rules, audit capacity, communication protocols. | Gap analysis → new legislation and protocols → regional harmonization |
Pathways to adoption based on financial market readiness
- Shallow markets: MDB pilots, grants, simple triggers.
- Emerging markets: Gradual rollout, investor education, regional standards.
- Mature markets: Innovation, integration with sustainable bonds, ICMA clauses.
Pricing considerations
- Premium of 10–25 bps in commercial bonds, negligible in MDB loans.
- Costs shaped by trigger design, deferral length, creditor type.
- MDBs and climate funds can subsidize.
Average time to deploy
- MDB lending: 12–24 months.
- Bond issuances: 2–4 years.
- Bilateral lending: 2–3 years.
- Regional harmonization: 5–8 years.
