7.2
INNOVATIVE CLIMATE FINANCE
currencies for a fixed rate plus a small premium. Such swaps are standard, with no real technical challenge cal- culating the ‘fair’ fixed SDR rate. The World Bank would then lend the funds at close to its cost, giving up income over time to encourage coun- tries to invest more in clean energy projects. The countries buying the SDR bonds would receive a financial instru- ment that either matched the financial characteristics of the SDRs held in their IMF account (which pays a floating rate) or are the financial equivalent (but pay a fixed rate). If the bonds settle in hard currency, they could be traded for cash outside the IMF’s special SDR window, making the instruments more liquid (and easier to exchange) than the SDRs now held in the SDR account. The World Bank – or a similar MDB – would expand lending without the challenge of placing new long-term bonds directly in the private market. From idea to actuality It is a true win-win-win. MDBs get a new financing source. Borrowing coun- tries get new clean energy finance. Countries buying the bonds get a bet- ter reserve asset than their current SDR deposits at the IMF. What obstacles does this idea face? The European Central Bank needs to conclude that any use of SDRs that pre- serves the characteristics of a reserve asset and maps to standard transac- tions conducted out of dollar and yen reserves is consistent with its require- ments for Euro system central banks. Some incorrectly think that SDRs can only be channelled through the IMF under the current legal regime, when the real requirement is that any rechannelling must remain a reserve asset and avoid monetary financing. The United Kingdom and the United States need to be willing to use existing legal authority to invest their reserves in high quality bonds and add to their functional reserve assets. It is doable. It just takes real political will.
energy finance without requiring any new shareholder contributions. Such financial creativity can help address the MDBs’ shortage of equity capital over time. A more immediate proposal requires a set of countries to contribute new capital (potentially by buying sub- ordinated debt) to the World Bank to support a special clean energy financ- ing window that would raise long-term funds directly from shareholders for long-term lending. This new equity could be levered five or six to one, so that every $10 billion in new capital would support between $50 billion and $60 billion of net new clean energy financing. The World Bank would issue SDR bonds for 20 or 30 years at either the floating SDR rate or at a fixed rate that reflects the market price of swapping a floating rate in the SDR’s constituent
IT IS A TRUE WIN- WIN-WIN. MDB S GET A NEW FINANCING SOURCE. BORROWING COUNTRIES GET NEW CLEAN ENERGY FINANCE. COUNTRIES BUYING THE BONDS GET A BETTER RESERVE ASSET THAN THEIR CURRENT SDR DEPOSITS AT THE IMF.
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98
Financing a Just Transition
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