This paper evaluates and analyzes the use of State-Contingent Debt Instruments (SCDIs) to support policy responses and strategies for Latin America and the Caribbean with the main objective of preserving the policy space necessary to both weather the immediate economic impacts and build forward better. This papers builds on a growing body of research examining how state-contingent borrowing can help governments better manage their debt commitments and contribute to improved welfare outcomes.
In addition, the paper also introduces and evaluates several state-contingent bonds designed to improve debt crisis resolution and prevention. The paper discusses the advantages and disadvantages of these instruments, looks at how debtors and investors might benefit, and evaluates possible ways of addressing the operationalization challenges identified in the literature. Changes to sovereign debt contracts introducing state-contingent clauses would help to improve debt management and fiscal space and reduce the likelihood of sovereign defaults.