 Good morning everybody and welcome to this conference on debt and innovative finance in developing countries, jointly organized by Bank of Finland Institute for Imagine Economies and UNU wider. Without further ado, I would like to welcome Pasi Helman, Under Secretary of State from the Ministry for Foreign Affairs to open this conference. Thank you very much. Good morning ladies and gentlemen. It's a pleasure to be here today and the topics of this seminar, debt and innovative finance are of great importance for the Finnish international development policy and work. And to my understanding, this is the first ever UNU wider Bank of Finland Transition Economies Center Joint Conference and that is a very welcome development congratulations. The pandemic, the climate change, food and energy crisis are having a devastating impact on financing of the 2030 agenda and the sustainable development goals. According to recent estimates, 4.2 trillion US dollars are needed per year and this is more than 20 times the annual amount of official development assistance. It is clear that ODA alone is not enough, not even if it will need to play a strong and hopefully a catalytic role in development financing. Then how to enhance trade investment, remittances and other private flows between the developed and the developing world for sustainable development. One answer by the European Union is its massive global gateway initiative aiming to channel 300 billion euros for infrastructure, digital energy transport sectors and the like. Connectivity projects around the world, money will come from both public and private sources and half of it is earmarked to go to Africa. But also how to curb illicit financial flows from developing countries, how to strengthen trade and investments between the developing countries themselves in Africa for example. We think that support for enabling business environment, rule of law, predictability, removing barriers for trade are needed and development finance can help in all that. And of course least developed countries and fragile states are in particular need assistance there is very much needed. In Finland alongside our traditional grant based development aid we have innovated in designing a new instrument to use what we call so called development policy investments. We work with multilateral and other partners to leverage public and private funds for the benefit of development and climate. So far our investment portfolio is over 800 million euros and it's expected to increase to over a billion in the next couple of years. In developing countries a strong domestic resource and revenue mobilization is also needed and I am aware and I wish to comment wider for its very good work on that issue. For our part we have established a tax and development action program involving in developing countries in our partner countries, national authorities and civil society organizations to strengthen tax compliance. Innovation then is very much needed in climate change and green finance. Adaptation to climate change is a pressing issue particularly for developing countries and it is good that on the road towards the COP 27 in Egypt next week more attention has been given to it. Financing for adaptation activities poses a challenge as private funds are more clearly more targeting climate change mitigation so we need new approaches. And while we need to be innovative with financing we also need to recognize the debt issues and the serious challenges they pose for developing countries. The pandemic really hit the debt sustainability of developing countries so that many now have great difficulties to honor their debt service obligations when trying understandably also to ensure sufficient expenditure on basic services for the future. And China's rise is as the biggest global international lender makes the debt challenge different from the previous time debt issues require strong international collaboration in the form of HIPIC initiative. And China not being member in OECD nor in the Paris Club of creditors questions have been made about the motives and transparency or non transparency of its loan agreements issues with excessive loans or too big of a reliance on one credit of country. And quite frankly through its somewhat slack approach in loan provision for many years China has caused the debt problem also for itself. For now it is true and welcome that China has accepted some debt restructuring arrangements. Actually since 2008 Chinese creditors have arranged at least 71 distressed debt restructurings. This is interesting compared to the total number of Paris Club restructurings 68 cases. And China's participation in the G20 debt relief process particularly in Sambia this year is a welcome development. However more needs to be done particularly a comprehensive and effective credit coordination and debt relief and restructuring system should be ensured and strengthened. So ladies and gentlemen I wish you all fruitful seminar and as a former UNU wider advisory board member it is a particular pleasure for me to wish you all that thank you for your attention. Thank you very much Pasi Fotos kind words and on sort of quick wrap up on some of the topics that we will discuss in due to the next two days. So my name is Eka Korharnan and the head of research at Bofit back of Finland Institute for emerging economies and one of the co-organizers of the conference. On my behalf and on behalf of my colleagues of course like to welcome you all warmly to Bank of Finland. And I would like to thank Kunas Sen and his colleagues at UNU wider for great cooperation during the preparation for the conference and I'm looking really looking forward to the discussions during this day and the next day. And of course warm welcome also those who are following the conference via the internet stream at the moment before giving the floor to Kunal just some words about the practical details here. So people in the audience here at the Bank of Finland are of course really free to post questions comments during the Q&A sessions. We hope that there's lively discussion on social media as well. If you for example are following the stream you can use hashtag that conf 2022 this will be sort of displayed later as well. And hopefully the questions can be picked up by moderators or then questions at the latest stage. The conference or the video stream will of course be available later. I think both in the YouTube channels of Bank of Finland and UNU wider. Hopefully at least at the latest on Monday. Then I will give the floor to Kunal. So good morning everyone. I'm Kunal Sen the director of UNU wider. I'm really pleased to welcome you to the Bofit wider conference on debt innovative finance and developing countries. UNU wider is a research institute UN agency think tank all rolled into one in a distance for over 36 years. Really from the very very beginning of UNU wider been working on macro economy challenges that developing countries face. And we are very highly regarded publications in that area. It's the first time they've organized a conference at Bofit and so much thanks so much Eka and his colleagues here on a team that is very important to both our institutions. And this is exactly why we decided to do this conference together. We are grateful for this partnership and the opportunity to hold the conference and the beautiful premises of the Bank of Finland. And for those of you who have been here the first time and see how beautiful the premises are both here and also when you go for dinner later on. And when we planned this conference a year back it was about a year when we started planning this conference. Little did we know that the problem that developing countries are facing on debt is so very relevant today. I mean we had probably had a really good idea that a year later we were a totally different place on debt. The developing countries are in the midst of a debt crisis that has not seen since the 1980s. For 40 years ago when we thought about the debt problem at that time most of the debt was owed to governments in the West. Officially vital creditors nearly all of whom were members of the Paris Club. Now what we have the situation is absolutely different. At the end of 2020 low and middle income countries owed five times as much commercial creditors as they did to bilateral creditors. This year of the nearly 53 billion dollars that low income countries will need to make on debt service payments. And on the public public and public guided debt just five billion just five billion will go to Paris Club creditors. That's quite remarkable really. So the sessions in this conference that is a challenge the debt of the debt challenge that they'll become his face. Especially the landscape that has changed dramatically in this last 40 years where we have commercial creditors and China also being very important lenders. But also the opportunities with fiscal policy and financial instruments that we also need to recognize. This year was the 30th anniversary of the adoption of the United Nations Framework Convention on Climate Change. And we are away from COP26 just 10 days away and we this critical need for debt bank countries access climate financing. And how does that happen at the level that we need. He also is increasing recognition that innovations of the green bonds allow significant opportunities for debt bank countries to finance zero carbon pathways. Instruments of this kind were not available before. We begin with the first keynote today to be provided by Professor Gopanidze. And the keynote will be chaired by Professor Tony Addison, the University of Copenhagen, who is also a non-residen senior research fellow at the UNI wider. The second keynote will be delivered by the Nobel Laureate, Bank Homster virtually later today. And the third keynote by Sarah Collin-Brader tomorrow. If there are sessions on green finance, corporate debt and sovereign debt, we try to make sure in this conference that we covered all the basis. That is why it is very important to have sessions of corporate debt, which is often left out in conference on debt. And it was very important to have a session, which is going to be a fantastic session in corporate debt with very leading scholars and who will speak on that and also sovereign debt and on green finance. Also so exciting was that we could get the two major reports on financing sustainability in this year. One by the World Bank, the World Economic Report 2022. The other by the United Nations, the UNDESA, on financing sustainability development in this conference. So I was really, really pleased that we could get both these reports to be presented in this conference. Now over to Tony to take the two to be the chair of the first keynote. Thank you very much, Kunal, if I could invite Hugo to come to the podium and to welcome you all again to this meeting. I'm Tony Addison, a professor at Copenhagen University and a non-resident senior fellow at UNU Wider. And it is my great pleasure to welcome Hugo Penitsa, who is a professor of economics and the PICTE chair in finance and development at the Graduate Institute of International and Development Studies in Geneva. Hugo is also director of the International Center for Monetary and Banking Studies, a vice president of CEPR, a fellow of an Italian foundation editor of Oxford Open Economies and International Development Policy. Hugo is formerly chief of the development and finance debt and finance analysis unit of UNCTAD and a senior economist in the research department of the Inter-American Development Bank. So I think Hugo is going to get us off to a very nice start here today in the first keynote of this meeting. So welcome to Helsinki again, Hugo. Thank you very much, Tony. Thank you for the invitation. It's a great pleasure to be here. It's actually the first time I'm in Helsinki. It's not the first time I'm in Helsinki. I've been in Vanta Airport many times, but I never left the airport, so that's the first time I'm actually outside the airport. So I'll be talking about this climate and that, and this will be, it's based on a report that we just published. This is the Geneva report on the world economy, which is produced by the International Center for Monetary and Banking Studies. This is usually commissioned to external experts, but this time I was one of the authors. And the other authors are there, so it's Patrick Bolton, Lee Boukite, Mitu Gulati, Beatrice Veder Di Mauro, and Jeremy Zettelmeier. So a few economists and a few lawyers. And so I click on this. So I was not at the annual meeting two weeks ago, but my friends were there, told me that there were two big topics. One was inflation and the other one, which will be the topic of the Geneva report next year, and the other one was climate and debt. So there is this idea that it was mentioned before by Kunal. There is this issue that we have these two crises, one which is related to excessive debt levels everywhere, not just in emerging and developing countries, I'm Italian, so that's something I think a lot about. And then of course the climate crisis, which is an existential crisis for the planet. And I'm going to present, organize my presentation around these four numbers, so hopefully as 300, 400, 60% and 6%. So this is the outline. I will say, and this is the way the report is organized. So a little bit about the climate perspective, a little bit about debt and fiscal space. Then the discussion of finance thing, which was mentioned before, which is key. And then I'll briefly discuss what we see as policies. And I didn't put the slide here. I talked about this report in Cornell a few weeks ago, and I had these slides with the perspectives. So I had some, you know, the perspective of the people in finance, the perspective of the people in the NGOs and the perspective of the economists. And the economists, you know, the typical car-caring economists tells it's simple, just carbon tax. And you know, and the typical NGO guy will tell you, well, just cancel the debt. And the typical finance guy will say, oh, will all this amazing instruments, you know, will, you know, the private sector will solve it, right? And our perspective is that, you know, all these things need to be part of the solution, but there is no really silver bullet. So all of them play different and important roles. And I'll try to say something about that. So let me start with the climate perspective. And here you want to, there are maybe four issues that you want to talk about. And one is the view from the planet. And then there is a local perspective. And then you want to think about conservation. You know, conservation really does some overlap with climate change. It's more a consequence of climate change, but it's an important consequence. And then we want to think about equity. And so, you know, I was trained as an international finance person. And you know, you always taught me this, you know, the Mandelian dilemma, right, that you want. You cannot have a floating exchange rate, a fixed exchange rate, independent monetary policy and free capital mobility. And then when we think about this, we almost feel that there is this. Maybe it's not impossible, but a difficult dilemma, right? You would like something which is feasible and scalable. You would like something which is fair and you wish something that is politically acceptable. And it's not easy. So I said that I gave you three numbers. So let me go to the first one. So these are the estimated from the international panel on climate change. And so they have a distribution, so you know, we don't know the future for sure. But the scientists are telling us that if we want to limit the increasing global temperature to 1.5 degrees, we have, actually we had two years ago, so we have less now, 300 gigatonnes of carbon left. So that's the first important number. That was the budget two years ago. In the meantime, we put other 40 gigatonnes in the atmosphere, so now we have 220. Let me put this. So that's the first number. The second number is how much we're emitting right now, and it's about 40. A year. So if you do 300 by four divided by four, you get about eight. So at current emission level, the target will be breached in less than eight years. And that's something that I didn't realize before starting working this. That's kind of scary. Now within matters for climate change is how much CO2 there is in the atmosphere. It doesn't really matter who put it. But we as people care about it. And if you look, so this is a map in which the size of the country, it's scaled proportionately to how much CO2 these countries are putting in the atmosphere. And you see that Europe is very large. And you see that Africa is almost not there. You can see South Africa, but you cannot see anything else. The US is more or less to scale because the US is a sparsely populated country. So it put a lot of CO2, but it's also, you know, very large geographically. So you don't see that. But the case of Europe, it's in the case of China, also it's Japan. And you can barely see Africa. You can barely see Latin America. So that's who is putting the stuff in the atmosphere. And I will show you a similar map soon, which makes exactly, makes a different point. Now the point is that why are these countries not putting much CO2 in the atmosphere is because they are poor, right? And that's clearly, it's not an ideal equilibrium, right? We want these countries to become, sorry, we want these countries to become rich. But they cannot become rich like China became rich by becoming the largest emitter of CO2. So they have to become rich in a different way. So China has been a massive economic miracle, lifted millions of people out of poverty and that's great. But it did it with all technology. And so, and that we cannot think of sub-Saharan Africa becoming rich in the same way because it would be an environmental disaster. So that's the global perspective, how much CO2 is in the atmosphere and we don't care who puts it. You'll tell me when I have 10 minutes. Yes. There is also a local perspective that who is affected by climate change. And so in order to reduce the CO2 that we have in the atmosphere, they reduce the flow of CO2 that goes into the atmosphere. We have to spend money to mitigation issue less CO2. But climate change is happening and the 1.5 degrees treasure will be breached with almost, we're almost sure. We're not going to go to zero emission in 80 years, that's pretty sure. And countries are being impacted by this. And here another type of expenditure is required, this expenditure adaptation, how we adapt to climate change. We have to do it and this will require investment in, you know, dams and all sort of stuff that protect countries from climate change. This is the darker this map, the more at risk from climate change you are. But let me show you a map that similar to the one before. So this is I scale the countries by size according to how susceptible are the risk of climate change. You remember before we didn't see Africa, now we see it. Before Europe was huge, now we don't see Europe. You know, we don't see the US. Look, I don't know this point, look at the Caribbean. They are massive, right? So there is in a sense a very unequal distribution between those who are causing the problem and those who are suffering from the problem. And that's important when we think about some sort of fairness. This is just, let me skip this. So there is this local perspective. This countries will need to spend money in adaptation and the issues, where is this money coming from? There is also the issue of biodiversity and again you see that countries which have, which provide biodiversity services and where the biodiversity is more at risk again tend to be countries in the global south. And these are also countries which have massive amount of unused carbon, you know. There are forests and which absorb carbon but they could be converted in carbon if you cut the trees. They have mineral, they have oil, they have all this sort of stuff. And when you talk with these guys it's a bit unfair that you guys became rich. By pumping a lot of carbon in the atmosphere now you're telling us remain poor to protect the climate. So how do we conserve these assets? How do we create the right incentive? So let me just go into a quick thought experiment and then we go back to that. So we saw that we have a budget left of 300 gigatons, pretty less. And let's suppose again let's put the hat of an economist and think how we do, how do we allocate this budget? Well, how do we reach this budget? Well, one way to do it is to allocate these 300 gigatons in some way and then let people trade. So that's cap and trade, you know, we know that that's efficient because then the carbon. But the big question, how do we allocate these 300 gigatons? And that's where fairness considerations are important. Sort of implicit in the Paris Agreement that this carbon budget is sort of allocated to those who are polluting right now, which doesn't seem fair, right? Might be another way to do it is that, you know, we allocate per capita. So we have, you know, 300 gigatons left, we have what six billions in the planet. We divide the 300 gigatons by six billion and we say that, you know, each Italian, each Indian, each fin as a right to put some gigaton in the atmosphere. And then might be cutting a mission, it's easier somewhere and it's more difficult somewhere else and then we trade. But we start with this initial allocation. So, you know, we study economics, we know that when under certain conditions the market will reach an efficient things. Of course, it depends the fairness of this thing, it depends on the initial allocation. And so might be a fair initial allocation is that, you know, each person in the planet is counted equally and each person in the planet get given amount of gigaton and then can buy or sell. Now, this seems fair, but then some people say, hold on, hold on. You Italians or Brits or Germans or Americans, you already put a lot of stuff in the atmosphere. You know, we from, you know, Congo didn't put much. In fact, if you look at the, who contributed, so the blue are basically the advanced economies and the red are the emerging economies. You see that the advanced economies, which less than 50% of the global population, they put much more than, you know, 50% of the carbon that's in the atmosphere. And if you remove China, which is this one, you know, the rest of the emerging world really put very small share. So there is this issue. There is, yeah, and this is, we see it clearly. So if you do a regression where you put income per capita, much CO2 you put in the atmosphere, these are clearly linked. One interesting thing that you can be rich and live well and emit less. So here if you pick two countries, so the countries where I live now, Switzerland and the country where I lived before living in Switzerland. So these are two countries with comparable standard of living. People in Switzerland live pretty well and they emit about, you know, less than half that much. So, you know, at the end we'll have to do something, but you know, something can be done without killing of standard of living. So something quickly about debt. Well, this is simply said, you know, debt is so. You need to spend money for both mitigation and adoption. And the ability to spend money is constrained by very high level of debt. There is a paper by us. So here when you do estimate, you see, you know, 500 billion, 1 trillion, 3 trillion. It's also like it says the bigger number, but whichever number you pick, it's big. It's big, but then when you think this number, which is estimated by this bunch of economists at the fund that says 500 billion per year. That's a massive number. But, you know, it's less than half a percentage point of the advanced economies GDP. So it's not a huge number. So this was just before. So this is the third number I gave at the 60 percent. And this was last year. So 60 percent of low income countries are either in that distress that's the black bar or are deemed by the fund and the war bank as being at high risk of debt distress. And so this is a way to see this fact that debt is constraining the ability of these countries, which are the one who need to spend more in mitigation to actually spend in mitigation. Let me skip this stuff. So this basically shows you that even in emerging countries, there is precarious market access spreads are very volatile. They respond to shocks a lot. So another thing that we show in the report that poorer countries are much more fiscally sensitive to climate shock. So a given climate shock in the U.S. has a smaller effect on the fiscal deficit than a fiscal shock in a poorer country. This is partly due to the fact that governments are smaller in emerging countries. Spreads, borrowing costs are more susceptible to external shocks and they are more and more susceptible to climate risk. So this is Uli Volts and these quotas have a lot of papers showing this and we sort of collaborate the results here. And this push up borrowing cost. So the bottom line that many emerging and developing economies might not be able to finance the need for adaptation investment. So Lenny would say what is to be done? So what's the financing? And here we explore three possible solutions, the possible way to address this, which were mentioned before. The first is the role of climate, of green bonds. And specifically since we're talking about, you know, one difference between mitigation and adaptation is that a lot of mitigation can be done by the private sector. So basically I put standard, I put environmental standard, so I do regulation and then the private sector has to invest, right, and that's too. But mitigation, sorry, but adaptation is mostly provision of public goods. So I have to build a dam to protect me. So the private sector is not going to do this, but it's going to do it if the public sector gives it the money to do it. And so that's where you need fiscal resources. So when we think about green bonds, we're not thinking about the green bonds issued by corporations. We're thinking about green bonds issued by sovereigns, which it's a more recent phenomenon. But there is some puzzles associated with this green bond. The first one is that, and this is the great thing when you team up with lawyers, so lawyers go and read contracts. And I'll show you an example of contracts, which will make you a bit more skeptical a bit about green sovereign bonds. Because there is really no commitment in that. So why do we have these green bonds? And green sovereign bonds, I'm talking. And the other thing that is discussed a lot in the literature, which again is sort of the other side of the coin. Why do countries issue green bonds? Presumably because that reduced their borrowing cost. But the evidence of this so-called greenium, which is the difference between the yield of a conventional bond, of a green bond and a comparable conventional bond. But this greenium, it's either very small or it's not there. So this is a little bit the market for sovereign of quasi sovereign green bonds. So here you have three color. So the green one are sovereign backed green bonds. So these are bonds issued by organization like the German Development Bank, KFW, which is not the German federal government, but which is fully backed by the German federal government. The blue ones are sovereign themselves. So this will be a green bond issued by the German federal government and the orange one are local governments. So two things that I would like you to notice that this is sovereign or quasi sovereign green bonds are a European thing. So if you look at the scale, this is 80 and this is the US that is four. In the US there is basically nothing issued by government or government backed. It's a local government while in Europe the sovereign, the real sovereign are issuing more and more. So this is 80, this is four and then the other big players are international organizations. So here the European Investment Bank has been a leader in this. It's actually the largest issuer in terms of amount. The World Bank issues a lot of green bonds, but they're very small. The European Investment Bank issue a smaller number, but they're much larger in terms of. So what is this green one? So the green one, it can be defined in two ways. The way we define it, it's the difference between the yield on a conventional bond and the yield on a green bond. So positive green in means that green bonds pay a lower yield. And what we find and what also other people find that is either not there or it's very small. One interesting thing that it seems to vary with climate risk. So this is a really preliminary research, but countries that issue sovereign bonds and there are also risk of climate change tend to have a higher greenium or a positive greenium vis-a-vis a country that issue green bonds, which are not a climate risk. And you see a little bit this in this graph. So this is the exposure to climate change and this is the greenium. So you see that there is a positive relationship. It's not super strong. The numbers are small. These are basis points, but everything seems to be something. Now the lawyers. So this is a typical language from the documentation of a green sovereign bond. I'll tell you the issue in a minute. But the issue is not relevant because we looked at many of them and we, me too and Lee looked at many of them and say, well, it's the intention of the issue to apply the proceeds in formal placement to finance eligible grain expenditure. There is no legal obligation to do so. And there is no legal obligation that this green expenditure will achieve its intended impact. So I issue this bond, but it says, you know, it's, so this is there from the Hungarian green bonds, but we find similar things from other countries. So what's another way? So one thing that we feel as more potential that the green, because standard green bond, it works like this. It says, you give me some money, I'm borrowing some money and I'm using this money to do some specific type of expenditure. I'm going to, you know, build a solar power plant or do something else. So there is kind of a location of money to something, which in the context of a sovereign is a bit strange because, you know, money is fungible so it can then go whatever. Even if there was a commitment, then there is not even a commitment. One thing that we think as more potential are sustainability linked bonds. So this is not, I'm not saying I'm going to use the money to do something specific. I spend the money whichever I want, but I'm committing to some target. I'm committing to cutting emission by X percent. I'm committing to do something which actually has an impact on climate change. And then the coupon on this bond will depend on whether I achieve this commitment or not. So I'm committing to cut carbon emission by two gigatons. If I cut them by two gigatons, that's great. If I cut them by more, my coupon will go down. If I cut them by less, my coupon will go up. So this seems to be a better way to do it from the incentives point of view. Okay. One thing that we think it has a massive untapped potential is a development of a carbon credit market. Let's go back to my thought experiment. Let's suppose that we have a global law that cups the limit to 300 gigatons. Cap emission to 300 gigatons. There is the issue how we allocate them, but let's forget about that for a moment. Then this market for carbon will arise naturally because people will have to try trade. And it will be a massive market, it will be huge. And this will read, and if you think in this world, if you have an allocation which is somewhat fair, we can easily imagine that you have people in advanced economies that need to buy carbon offset from people in emerging economies and poorer economies. And then we generate massive flow of money from advanced to emerging economies. And this massive flow of money will not be aid, it will not be a donation, it will not be a gift. It will be a right, I have something to sell. But to do this, these carbon markets need to be compulsory. So I flew here, either the Bank of Finland or why they bought my ticket, but I bought another ticket to go to Beirut last week. And I bought another ticket to go somewhere else next week. And when I book on Lufthansa, I get this thing, do you want to offset your flight? And there are three options, whatever offset, so I just bought a ticket for 300 euros. And one offset, it says it costs 2 euros to offset. Let me say you want to offset a little bit more, it costs 100 euros. And then there was another one, you really want to offset and it costs 400 euros. And tell me who's going to pay 400 euros to offset a flight that costs 300 euros, right? And so it's kind of, you know, everything helps, but until this is compulsory, it's not going to do much. And let me skip this. And you see this, and in a sense this is what you see when you book your flight on the thing and you see these three options. There are all sort of carbon offset and they're all low quality carbon offset that sort of make you feel good, but they're very cheap. And then there are the true one, which are expensive. But very few people, I mean, you know, these guys were paying my flight to go where I need to go on Monday. If I tell them that, you know, that I bought, that the flight was 350 and I bought a 400 euro carbon offset, this guy tells me you're nuts. There's no way we're going to reimburse you that, right? So that's the issue. That relief from climate. So if we go back to the Timbergen rule, which is something we were taught at some point in our life, you know, we have instruments and we have objectives and we should match them. And in general, if you want to provide rooms for climate change adaptation and mitigation, the best way to do it, well, one way would be to have this offset market that would solve the problem in a sense. But in the absence of this, we thought that the best way to do it is the Jerry Maguire answer, show me the money, right? It's with grants. And if the goal is to reduce debt, that restructuring is the goal. And this idea that we should match the two of them, it works in a few cases and we discussed a few cases. But it's not the solution in most countries, partly because there is no clear alignment between countries which have debt problems and countries which have high adaptation needs. There is some of it, but it's not perfectly aligned. But also because there is an incentive structure, which I can discuss in the Q&A, I don't have time now. But there are some cases, I'm not saying that this should never be done. There are some cases in which this should be done. And one of my co-authors, Lee Boukite, has done this for Beliza recently and has been. But we need to be careful in doing this. What we think it's important is that when a country needs to restructure its debt, we need to include future climate expenditure when we compute the threshold that determines debt sustainability. And the fund is just changing its DSA methodology to include this. So climate needs to be considered when we assess the haircut that the country needs, the country which is unsustainable. But there is something that needs to come with this that needs to be some climate conditionality. Because if we say, okay, the country needs a bigger haircut because we'll have to spend money in adaptation. And is this good for the credit or because this will reduce the likelihood on another debt crisis. But then if the country doesn't do this, people say, well, you know. And the way to do this is to do it by restructuring debt through this sustainability-linked bonds that I mentioned before, which seem to have a proper structure of incentive. So policies. So remember I gave you four numbers at the beginning, 340, 60% and six. So let me conclude with six. Because as I said, we don't think that there is a silver bullet, but you need a whole menu of policies. And our menus are six components. And these are the six components. And I don't think they're ranked in terms of importance. But the first one is clearly what I feel is one of the most important. And this is idea to create a mandatory. And this mandatory is the key market for carbon offset. The second one is the one I just discussed. Climate risk need to be included in that sustainability analysis at the moment of debt restructuring. And this has to come with climate conditionality. And if we do this, this will sort of will be a positive market creation externality because this would lead to the creation of sustainability-linked bonds. But then of course we need a system to verify and monitor the compliance of the condition linked with these sustainability-linked bonds. The fourth one and it should have gone probably on top. The first of the second is the Jerry McGuire story I told you before. They show me the money. There need to be fiscal transfer. This has to happen. So there need to be grants. Much more than what we have been seeing and what has been promised. If we want green sovereign bonds to play a role, we need to have sovereign bonds that actually commit. Green sovereign bonds that commit the issuer to do something. So we need a better legal framework. And that for natural swaps. They are always the unrealized promise. They have been around for a long time but there has been very little money so far. Now it seems that there is one for 700 million dollars that is going to happen. But so far if you tally up all what has been done since the 1980s has been really peanuts in terms of total value. So if we want this to be an important part of the solution, we need to improve their design to make them bigger. And I will close here. Thank you very much. And so this is the sixth. So thank you very much Ugo for really getting us off to an excellent start bringing together the two big themes of the conference finance debt climate. I mean this is an among us agenda that we have. So we're now going to go into some Q&A. And the way that we'll do this is that I think we'll have a question then we get Ugo's response. If we're starting to get a lot of questions then I'll start grouping them together in the interest of time. But we have enough time now for a good Q&A session. So who's going to get us started off on this agenda? Perhaps as well if you could identify yourself. I know some of you, not everybody knows each other so please say who you are if you could. Thank you. Parish Sanjay Banerjee, I'm from the University of Nottingham and thank you very much for this comprehensive presentation. Now I'll keep my question very short in the sense that is if I can just sum it up your whole lecture. The two important points that I thought. One is of course the commitment like the either is sovereign or any other entity raises the fund. Okay, that doesn't mean that it will be used for the same purpose that it was assigned to. And also imperfect observability, right? So because this is something is not like a project, okay? Because who knows how much climate pollution has been made by the government AX, the government Y and etc. So any sort of finance related issues where there exists enough incentive for the issuer to use those two aspects to fudge the issue. So what would be you think there is a proper instrument or the institutional framework in between the investors and the issuers to make it things happen. Good, thank you very much Sanjay. So I'm going to ask you go to respond to that one because it's quite a complex question. Many of these debt contracts come down to information issues and information asymmetry. So Sanjay's got us off to a very good start there. Yeah, so this is indeed, you know, a massive issue. And that's why we like or I don't want to put words in my quarters. I like this idea of sustainability linked bonds, which are, which have coupons, which are related to some measurable outcome. So you could think of a, you know, what's a measurable uncle? How much CO2 you put in the atmosphere? But that's, it's not perfectly measurable. Nothing is, you know, GDP is not perfectly measurable, but we can get a good idea of that. And then I'll tell the country, look, your coupon payment is going to be linked to a much CO2 you put in the atmosphere and then do whatever you want. You want to cut CO2 by doing, you know, I live in Switzerland and next to Switzerland is France, where there are these people who like the growth. You want to, you know, you want to put less CO2 by becoming poorer. I think it's a bad idea, but you know, you do whatever you want. You want to put less CO2 by building solar plants. That seems to be a better idea. You do it. You do it with whichever way you do it. And I don't care, you know, I'm not going to write a contract that say you have to put 300,000 solar panel, put 26 wind farm, you know, you do whatever you want. I'm just going to observe something. I just going to observe how much CO2 you put in the atmosphere and that's it. So again, nothing is perfectly verifiable, but this seems to provide the right incentive structure. Good. Thank you again. So as a gentleman there, could you tell us who you are? Please. I don't need sorry on. Oh, okay. Sorry. It's been a long time. Thank you so much. I work for IDRC. Thank you so much. It's not really a comment on the presentation, but some comments came on. I'm saying that because the presentation was fantastic. I think the six policy recommendations are plenty for us to get into. The comment is on the differentiation among lower income economies. It came up in my mind a couple of times when you said, for example, most of the debt is now private. That actually differs an enormous amount depending. The lowest income countries are still mostly, the debt is still mostly multilateral. And that has huge implications for any of this policy. And the same goes, I think very importantly, for the availability of private finance. It is the better off countries that have probably had access to the private markets that now have a different type of problems. I just want to say, and I'm sure you're going to agree with that. The policy recommendations then are really different for the global south is really very diverse. But thank you so much for a great start. Yeah, correct. Just to agree with you. That structure has changed enormously. And again, it was mentioned in the introduction that in the 80s we had a debt crisis. And pretty much everybody was borrowing in the same way from official borrowers from syndicated bank loans. Now we have a much wider menu and of course these complicated things. It's interesting. 20 years ago, Wyder held a big conference on HIPPIC debt relief. In fact, Arjan, you might have been there. We're now in a totally different financial landscape in many ways 20 years on. But with a different sort of debt problem now colliding with the climate issue. Well, we're still vigorous. Next intervention, please. The lady, lady there, please tell us who you are. Hi, Sarah Collin-Randa from ODI and thank you so much. That was really interesting and enlightening. I'm going to abuse my position with the mic to ask two questions if that's okay. So the first one is that I was really struck to hear that to see your graphic showing that debt distress was increasing in lower and lower middle income countries before the pandemic struck before the current energy and food price shocks. What's on what the drivers were from sort of 2014 to 2015 when that started accelerating and how you think that will look now with those additional huge shocks coming down the line and really starting to play out. And my second question. I was also very struck by your comment about the fact that adaptation mitigation and transfer transition finance should come in the form of fiscal transfers and as grant based. And I think everyone in the room is very aware that that's going to be one of the extremely fiercely contested topics at COP 27 in a couple of weeks. My own sense of that is that adaptation finance has a very strong consensus that that should be grant based as a local public good difficulty of getting a return on investment. But I'd love to hear why you think mitigation and transition finance, which has the potential to generate returns should best be done as grants. Whether that's just grants to the multilateral system where loans and grants and guarantees and so on. They're after play a bigger role. Thank you very much. Thank you Sarah. Okay. Thank you Sarah. So the first question. So now we divide the world before COVID and after COVID. My last conference before with COVID actually I was with Shakira. We were together in Kampala. And I showed this graph, but of course two years back and I actually made the point that you just made this thing is increasing. And it's increasing. It was increasing already before. So clearly COVID amplified everything. But it was increasing for all sorts of reasons. I don't think there was just one specific reason that was just. So I think each country was different now. And then the recent increase clearly COVID was the big thing. But the point that I made at that point. So let me tell you a story about another conference which was maybe 10 years ago. And so this was a conference in Tunisia. And there was this debate. Do we need a mechanism to solve that crisis? And I was debating in favor. And there was Carlos Primo Braga, which at that point was at the World Bank, which debating against. And he changed his mind, but at that point he was against it. And then we had this, you know, it was this Oxford thing in which first people vote and then you debate and then people vote again. And in the audience there was a very senior person from a European country. Slightly south of Finland. And slightly north of, I don't know where, north of Belgium. Anyway. And this person said, why are we even debating this? You know, we did HIPPIC. We did the MDRI. Now we have the SDA. What is called this? What is called Shakira, the thing to evaluate the sustainability for low income. But it has a different name for low income. Anyway, we have this thing that the World Bank and the fund came up. There will never be that crisis again. That's what she said. And, you know, she was the head of a, you know, very important. And I said, well, you know, I hope you're right. But she wasn't right. So we keep going to that crisis. Fiscal transfer. Sorry, I was not clear. I meant pretty much what you said. I said that most of the expenditure in adaptation. Has to be public expenditure. And it is in countries which have limited fiscal capacity and will have to be funded by transfer. Expenditure mitigation. The private sector can play a bigger role. So I tend to agree. Cannot do everything because there's going to be some transition, some leapfrogging. And, you know, and we know that there are issues with private sector money going in developing countries. We need something, some form of guarantees. We need something there too. But I meant exactly what you said, sir. Before we proceed to the next question, maybe I could just tease you out a little bit more, Hugo, on the nature of the shocks, which was the first part of Sarah's question. Because, you know, at the start of the presentation, you put up, you know, the view of the earth as the multiple shocks that we're going through. And of course, one of the issues we're all facing now is, you know, where a global interest rate is going. And of course, if we knew the answer to that question, it would be extremely wealthy because nobody really knows perfectly. But of course, the Federal Reserve and the other central banks are ramping up rates and that has consequences, particularly if you have dollar denominated floating rate debt. I mean, what's your sense of the situation that, you know, last year we were thinking a lot of countries on the precipice, Sri Lanka was really going under. Now people, as some people are saying, well actually Latin America is in a better state of the world. You know, they've got flexible exchange rates. We're not in that world of the 1980s. We don't have to worry about a sort of Volcker type shock occurring. What is your sense of that? If I could just tease you out on that before we get to the next question. So thanks. So I think there is some truth in this. I think that balance sheets are stronger. Country balance sheets are stronger on average than what they were in the 1980s. And that structure is different and so there are many differences. So maybe let me answer in two parts since you mentioned this and this is related to what Sarah asked. So in that conference in Uganda, I was talking about my old research and original scene on the fact that, you know, emerging and developing countries tend to borrow in dollars. And one of the element which I showed, which was not the only one that led to this big increase in debt, is the typical thing that money of dollar debt and your currency depreciates. And that was not linked to increasing interest rates because interest rates were still very low. But, you know, countries have idiosyncratic shocks and I was showing that part of the countries which very high increase in their level of debt was due to exchange rate shocks. Recently, the paper is not out yet, but we're finishing it. Barry Eikengreen, Ricardo Asman and I wrote a paper, you know, original scene 25 years later. Makes you feel old, but anyway. In which we kind of revisited the work that we did in the late 90s, early 2000s. And we see a little bit of this. So if you read a newspaper, they say, you know, this original scene problem is no longer there. And it's true for a very small number of countries. So you have a few countries like Peru, which now they're borrowing a lot in their own currencies. And, you know, in South Africa is doing it and Brazil is doing it. But it's really limited to about 20, 25 countries. So the other ones are still borrowing very much in US dollar in foreign currency, but it's basically dollars with the exception of some country in Central and Eastern Europe. So the movement in the dollar exchange rate will have an effect. On the other hand, this many of these countries, many countries are also kind of self-insurance in the sense that they are borrowing. And then they have reserves on the other side of the balance sheet, which make borrowing kind of useless in a sense. But yes, so I think the situation is better than what it was in the 80s, but it's not perfect. Okay, so you're giving us a little bit of hope there. So the next question, I think we have Amir, are you raising a hand? Yeah. And then we, yeah. Thank you, Hugo, for a very stimulating presentation and report. My question was on green bonds as part of your menu of options. It's clearly a growing phenomenon, but my question was why aren't more countries using them? What are the challenges that you see moving forward for those of the countries that are more vulnerable to climate induced distress using those green bonds? And as part of the activities that are eligible for it, to what extent is there a tension between activities that are directly aimed at reducing or improving environmental impact versus those that are aimed at improving climate resilience, even if it doesn't mean direct impact, diversifying productive structures around low carbon industries and these kind of activities. Amir, could you say to the audience who you are? Sorry, my name is Amir Lebedui. I'm a lecturer at SOAS University of London. Good, thank you. So we'll take that question and then it will be over to Shakira. So why don't we see more of them? Well, to answer, number one, this market is growing very rapidly. So the glass is always half empty, half full, but it is growing, right? So if you look especially in the case of Europe, it's still very small. But it's growing. But the answer why we don't see more of them is partly because, again, so I have a normal bond, which it's easy to issue and how to do it or whatever people are used to it. And then I have to do something which is more complicated for which I get basically nothing. So the greenium is really, really small. So estimating the greenium is hard because you need too much bonds, right? You need to find a green bond and a conventional bond which is identical. So a few countries have issued twin bonds like Germany did. So there it's a bit easier to compare, even though the bonds are not really identical because one is much larger, the other one is much smaller. So you can think of that liquidity chain, but at least all the characteristics of the bond are the same. And the greenium is like two, three basis points. So why do I have to go and make all these things for two, three basis points? So I think that's the key issue. And then the issue you tell me why it's just two or three basis points? Well, there are two explanations. So we discussed a little bit the explanation in the report. And one is the, so we have the Sherlock Holmes story, like the dog that didn't bark. Why there is no greenium? Well, because there is no commitment. So why should I, as an investor, I should give up some yield even if I care about it, but then you're not committing to anything. That's one possibility. The other possibility that investors don't care, that they like to say, you know, we like to invest in green stuff and blah, blah, blah, blah, but I'm not willing to pay anything. Meaningful for it. We don't know what the real story is, right? Something I notice you go from the figure you put up is how low the issue is in the United States, which given, you know, the massive and deep capital markets in New York is a shocker. Is it not? Yeah, so these are just sovereign or quasi sovereign. So they're not, if I had put their corporate bonds, you would get much bigger. So these are just sovereign or quasi sovereign. The figure that I showed you are just, well, the government itself, government backed entities or local governments. And so in fact, in the U.S., there is quite large issues by local government. So there are a lot of bonds issued by local governments in the U.S. But these tend to be very small, right? So these are the local power plant, the local, you know, water authority. Okay. Thank you. Please tell us who you are. And then I'll take the lady in the corner. From ODI. So in terms of the green bonds, because I looked at it as well, I think one of the challenges to is having a legitimate incredible sustainability brand. And it's not something you do overnight, right? I mean, countries struggle doing their basic public investment programs. So to add another layer of sophistication, there is a tri transaction cost basically. And, you know, hopefully as we go forward, it becomes more integrated into national planning and that cost goes down. So my question for you, because I know you've written on this a lot, is the idea of what countries borrow for. I work in debt management. I'm a fan of debt when it's done right. I think people, some civil society actors think debt is a bad thing. But, you know, being able to borrow to foreign critical expenditures is a good thing. Curious, compared to the previous crisis, do you think that countries have gotten better of borrowing for the right things? Especially countries who've been issuing in the international capital markets. And if not, how do we change that? Thank you. Thank you, Shakira. Are they borrowing for the right things? You know, you're going to get the economist answer. It depends. Some countries have and some countries don't. And that you see, the countries that have are countries which are not in a debt crisis. But that's a very complicated issue. So let me tell you about the approach. This is the big advertisement of my work. So I'm doing a paper in which I'm trying to estimate public investment quality. At the end is what you have in mind, right? So because if I'm financing to do something and, you know, so there are two things which are public investment. One thing is a road to the village where the mother of the president was born. That's a public investment. It's probably not a very productive public investment. And then you can think about public investment that, you know, create, you know, might be a harbour or whatever, which helps. And so they're both, you know, they're both in the national account considered public investment. They're both financed with debt, presumably. And one of them will generate resources to repay itself, even if we forget about the environmental sustainability issue. And the other one probably not. So we are trying to create an index of the quality of public investment. There is an index that exists that have been built by people by the IMF era, the era de Blanaris and quarters. And the way they built this index was by basically look at the procedure, look at the law, you know, does this country, does this procedure. So yeah. There is clearly some value in this. Being an Italian was lived in Italy and in Switzerland. I realized that laws mean different things in different countries. And so this is useful. So we tried to build a de facto index. And what we did, which is clearly problematic, so we found out that the World Bank doesn't expose the world. So there is an evaluation of each investment project financed by the World Bank. And so there is this kind of factual like exposed evaluation and there is a score, there is a number. And you know, and part of these things is determined by how big the project is, what field, the problem in fact some fields are more complicated, other four. But if I run a regression and I control for all these project specific characteristics and then I take out this regression, I take out the residual of this regression. And I average it for country because the good thing of the World Bank, this has been doing this for 20 years and I observe, I'm observing many countries. So for each country I have, you know, dozens of projects and I can compute an average and I use this residual as a measure of the quality of public investment. So I have this index and one interesting thing and this is very preliminary, that we have some evidence that countries that invest more, that's a higher level of public investment and have a low quality of public investment, a higher level of public investment is associated with the higher borrowing cost. So that what it means, that I'm spending the money, but the money is wasted and somehow the market sees this and in countries that have high levels of public investment, but my index tells that investment is good, the spreads goes down. So we're working on this, but this seems indeed to be an important thing. So let's read the paper. The paper is not out yet. So less than five minutes to go. So I'm going to take two questions grouped together. The lady at the very back in the green and then I'm going to take Marty Hetemaki and then we'll have to close the session unfortunately. So please. Great, thanks so much. I'm Sherry Spiegel from UNDESSA and so I'm interested in that paper as well. That's very linked to a lot of the thinking we've been doing at the UN. So I have two questions. One is just a follow up Antoni Ackensson's comment of whether countries are in better shape than they were. And because in the 90s we were in a situation where a lot of countries jumped to what we started calling them emerging markets. And those countries are clearly seemed to be many of them in a better situation. But we also have a whole new set of countries that weren't accessing markets at all in the past. And so is it just the point of shock or the point of crisis is just shifting or are we really in a better place? The second question is about the swap issue, debt for climate swaps. Because we the of course economists say well no why put these two things together it's more efficient not to. But then as we know how much money is there really going to be in grants. And if politically if the first best of having grants and debt write downs don't happen. Then it doesn't make sense to bring the two together because there may be a political incentive to do so. Especially when some of the donor countries and an official debt because donor countries can actually use it for further NDCs as well. So just some to think more and then if so because I'm afraid that one of the reasons we don't move forward. Is because all of our economists are saying don't do it it's a bad idea. And the institutions that need to do that need the economists there say don't do it it doesn't make sense. So just wondering on your thoughts on that. Great thank you very much and great to see you again. Welcome. And then Marty please. And we all know you but perhaps you could introduce yourself to the people who don't. Yes Marty Hatemaki and from the University of Helsinki and Aldo University form a bureaucrat. I understood that I mean on this swap issue and that you saw a sort of possibility or opportunity to convert the debt that is going to be restructured to the sustainability linked bonds. And indeed I think it's any refer that it would create a market. And just two sort of questions related that sort of very technical questions but substantial as well. If a country that sort of converts its debt to these new sustainability linked bonds would need to sort of pay higher premium. We are not going to achieve these goals. And if for some reason it does worse than expected in terms of economic development then it would be hit by double whammy. I mean wouldn't it put this country into a very difficult position. And I was wondering that could a solution be the one that was used in the sort of Mexican debt deal that the coupon increase would be linked say to the economic development of the country. So it would take into account the what the country can afford. And second I mean isn't the time lag rather long from the measures that the country undertakes to the climate results. So is there a problem in that respect as well. And could one deal with that problem link the coupons to policies say like reducing possible subsidies or something like that. Good thank you very much Marty. So I have to ask you to give brief responses to some complex questions and then we'll be moving to the next session. Okay so let me start with which shari. So emerging market and leak. In fact I'm going to tell you you're 100 percent right on both of your comments. So emerging market and yes so emerging market seems to be better. And that's what I also we found in this in this paper with Barry and Ricardo which hopefully will be ready soon. But you have this leak which in the past they didn't borrow from market and now they're borrowing from market. So the crisis might come there. So that's 100 percent right swaps. So in the report it's not here but we make exactly your point that might be swaps are a second best when you consider political constraints. So first best is grant. But if the money is not there well you do what you can do with the money. So it's so I didn't mention this. I didn't have time but we discussed this in the report. So now Marty's question. So so you're right in a sense that if I have a bond in which the coupon increase if I don't achieve my objective that actually. Could cause problems because you then could increase the default risk in a sense and then people will find. So you could structure the bond in another way. You could structure the bond with carrots instead of sticks right. So you could structure the bond in a sense that you have a coupon that goes down. If you achieve the objective and it's predetermined if you don't achieve the objective at least you know you don't have a negative surprise. Now the people in the market they say how we don't like this stuff because it negates or fiduciary duty whatever I don't know. It's very strange when you talk with people in Wall Street or in the city of London because this guy they did triple CDS of CDS over CDS over CDS. And then you tell a contingent. No no no that's too difficult. So so briefly you go. Yeah I'm gonna one minute and be done. The other issue you mentioned the case of Mexico. So that's would be a case to have a GDP index bonds. We have been in shari and UN days and we are all but we've been preaching of this. It's another thing that is not happening because people in Wall Street this is too difficult. I don't really understand that. And the time lag. This is an issue but so this is a technical issue which you have to talk with climate expert which I don't know. I would be a bit worried to linking it to policies just because then again you have this issue of verifiability. And then you say well at the end the parliament the legislative is supreme. And you cannot bind the political decision in a country to something that you write in a bond contract. And that's why these bonds they say we make no promise because at the end of the decision we have to be taken by you know by the parliament. Well I think that's an excellent note to to end on to thank you go for a really splendid session and to move towards the next session to continue the conversation as we're doing so. So thank you very much.