The value of debt pause clauses

As the frequency and severity of economic shocks increases, countries need tools that can provide rapid liquidity when it matters most. Debt pause clauses are emerging as an important instrument in their crisis response toolkit.

Debt pause clauses in bond contracts allow borrowers to temporarily defer debt service payments when a crisis hits and previously defined conditions are met. They are gaining traction: increasingly adopted by multilateral and bilateral lenders, endorsed at the Fourth International Conference on Financing for Development, and now proposed with broad triggers for emerging market sovereign bonds by the London Coalition on Sustainable Sovereign Debt.

Commissioned by the Sustainable Sovereign Debt Hub and produced by ODI Global, this paper examines what would have happened if seven middle-income countries had debt pause clauses embedded in their bonds at the time of recent major shocks.

Key findings

Pause clauses could deliver real, rapid liquidity relief.
Analysis of seven middle-income countries that recently experienced major shocks shows they could have deferred 0.2% to 1.7% of GDP in interest payments, comparable to the size of emergency IMF financing.

Success depends on creditor coordination.
A key condition for triggering pause clauses in bonds is that similar provisions are activated across the rest of a country’s non-multilateral debt stock. For many borrowers, China is the largest bilateral creditor, making Chinese lenders’ agreement to defer interest payments critical to whether pause clauses can be triggered.

Relief need not come at a cost.
Barbados’s 2025 bond issuance shows that pause clauses need not raise borrowing costs. Paired with enhanced debt transparency, pause clauses can be cost-neutral for issuers.

Why this matters

Pause clauses can provide significant fiscal space in response to shocks. In the immediate aftermath of a disaster, fiscal space shapes what governments can do and who they can protect. Liquidity relief of 0.2% to 1.7% of GDP, delivered without the delay of negotiating a separate facility, can help determine whether a government can absorb a shock or is overwhelmed by it.

Pause clauses should be part of a broader toolkit. The London Coalition’s proposals for debt pause clauses in emerging market bonds are an important development, but pause clauses work best alongside other contingency financing tools, including funds, loans and insurance.

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