This new equity could be levered ěëÚäçèÞíéääãÚ meaning that every $10 billion in new capital would sup- port $50 billion to $60 billion of net new clean energy ěãÖãØÞãÜ $10 bn $50 bn $60 bn
that settles in one of these curren- cies could be traded in the secondary market, with all the characteristics of a classic reserve asset. They are well designed to support long-term clean energy and climate lending. Standard bonds are not equity and cannot be leveraged, which has led some commentators to (inaccurately) claim they lack financial advantage for MDBs. That is far from reality. Senior SDR-denominated bonds would allow the MDBs to tap a captive buyer base for very long-term bonds – something the MDBs generally do not have. Most MDBs fund themselves with relatively short-dated (five- to seven-year bonds) that are rolled over to support long-term lending. It works – but requires a liquidity buffer that limits the bank’s ability to lend all the funds raised. For longer-dated bor- rowing, the banks must often pay a substantial premium on the risk-free rate. For instance, the World Bank’s concessional lending arm, the Inter- national Development Association, issued a 20-year, euro-denominated bond priced at 85 basis points over the
euro area’s risk-free benchmark. Big- ger bonds would pay bigger premiums. SDR holders need to receive a floating rate to match their SDR liability. But as long as interest rates float and bonds can trade in the secondary market, they do not need a short tenor or carry a significant risk premium. Rather, they could just pay the SDR rate over a matu- rity of 20 or 30 years. Some SDR holders may also be willing to swap the current SDR floating rate for a fixed rate SDR or SDR linked bond, which would provide MDBs with long-term financing at a nominal rate of around 3%. How does this relate to climate financing? SDR bonds could be used to mobilise large sums for climate finance in two ways. The World Bank could borrow SDRs to hold in its own liquidity buffer. That would free up existing dollar and euro borrowing for lending and reduce the World Bank’s cost of funds. This cre- ates capital over time, as more of its existing interest income flows back to it. This process effectively expands the World Bank’s ability to lend for clean
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