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ICMA announces working ‘term sheet’ for GDP-linked sovereign bonds
By Marisa Wong
Morgantown, W.Va., March 14 – The International Capital Market Association published a draft of a “term sheet” for GDP-linked sovereign bonds.
An ad hoc working group consisting of investment managers, lawyers and economists from the Bank of England, together with support from ICMA and other trade associations, has prepared a model set of terms and conditions for GDP-linked sovereign bonds, according to an ICMA notice.
The basic concept of GDP-linked government bonds is for their coupons and principal payments to be indexed to nominal GDP. This allows both the burden of servicing interest payments and repayment of principle to adjust with the sovereign’s ability to pay.
ICMA highlighted that the major market and social welfare benefit of this is to reduce the risk of sovereign debt crises and disruptive defaults during a recession or downturn. Often, GDP-linked bonds are seen as a form of holding equity in a sovereign, whose entire return will vary with economic performance instead of on a fixed basis.
GDP-linked bonds can be designed to reduce the default risk premium by allowing the debt servicing burden to be reduced in times of fiscal duress, ICMA explained.
On the other hand, for investors, particularly those who believe a particular sovereign may be on its return to prosperity, GDP-linked bonds offer returns that can later outperform corresponding conventional bonds, ICMA pointed out.
Over a longer period of time of continued issuance, GDP-linked debt as well as other forms of state-contingent debt could work to de-risk sovereign balance sheets, ICMA said.
Questions may be directed to Leland Goss, managing director, general counsel, and a member of ICMA’s executive committee (+44 20 7213 0336).
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