When financing is scarce, developing countries may try innovative approaches to raise capital
Developing countries have an outstanding short-term debt of nearly a trillion dollars. According to the World Bank, they face a financing gap of $370–$700 billion. Given the severe crisis of confidence in debt markets, it will be extremely difficult for countries to obtain private financing using traditional financial instruments. Innovative financing approaches are required, especially for private sector borrowers in developing countries, who face even harsher credit rationing than public sector borrowers.
Scarcity of capital threatens to jeopardize long-term growth and employment generation in many developing countries, which have limited access to capital even in the best of times. Official aid alone will not be adequate to bridge near- or long-term financing gaps. Ultimately, it will be necessary to use official funding to catalyze private flows to developing countries—adopting innovative financing approaches such as targeting previously untapped potential investors or using structures with credit enhancements to tap existing investors.
Stimulating such approaches is easier said than done, especially during the deepening financial crisis. But the debt crisis of the 1980s was ultimately resolved via an innovation—the creation of Brady bonds in 1989. Those bonds, named for then–U.S. Treasury Secretary Nicholas Brady, securitized the bank debt of mainly Latin American countries into tradable bonds that could be purchased by a broad investor base.
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