Sovereign governments cannot assess their own creditworthiness because of conflict of interest. When sovereigns issue bonds they need a third-party assessment of their creditworthiness, encapsulated in a rating, to attract potential investors. Private credit rating agencies (CRAs) have filled this void as third parties who provide assessments on sovereigns’ ability and willingness to service debt commitments. Their assessments constitute financial information.

Traditional sovereign debt has been used for a long time. The benefit of accessing to these international markets is that the country can smooth national consumption over time. The main disadvantage is that repayment is a rigid commitment; hence countries face difficulties to honor the debt service when an adverse event occurs. That is, countries, especially developing ones, can hardly avoid the pain of pro-cyclical adjustment.

Special Drawing Rights (SDRs) were created by the International Monetary Fund (IMF) in 1969 at a time of international reserve scarcity to supplement the reserve assets of IMF member countries. SDRs are not money per se but rather a potential claim on freely usable currencies of member countries. SDRs can be traded for these currencies at a variable but very low rate of interest. SDRs are a source of liquidity that can be particularly useful to small and financially constrained economies.

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 the aftermath of the Global Financial Crisis (GFC) (2008-2009) the external financing needs of Latin America and the Caribbean have increased significantly reflecting a process of external debt accumulation that has occurred in all developing regions. This process of debt accumulation has been reinforced by the impacts of COVID 19. As things stand, Latin America and the Caribbean (LAC) is the most indebted region in the developing world.