The Quality Criteria: Adding a Quality Dimension to Sovereign Debt Management

Introducing the Cost–Risk–Quality (CRQ) Framework for Sovereign Debt[1]

Introduction

For decades, sovereign debt has been debated almost entirely in terms of quantity and cost: how much a country owes, what it costs to borrow, and the probability of repayment. Debt sustainability frameworks, markets and policymakers have grown increasingly sophisticated at measuring all three. Far less attention has gone to a more fundamental question: is all debt created equal?

This paper argues that — particularly for low- and lower-middle-income countries (LICs and LMICs) that also access concessional finance — how these countries borrow from the market matters as much as what they borrow for.  Certain debt instruments are qualitatively better than others – in particular, for certain borrowers. Yet the current sovereign debt assessment framework, focused as it is on cost and risk, has no way to evaluate quality.  Until quality is treated as its own dimension of debt management, these countries will not capture the full benefit of the capital market instruments best suited to their development financing needs.

This paper focuses on bonds and other capital market instruments rather than loans, although many of the characteristics of quality debt discussed below can also be captured, in many cases with greater ease, in sovereign loans.

What is “Quality” Debt?

Debt instruments are contracts, and their terms can be shaped by the borrowers and lenders who use them. At its simplest — the conventional Eurobond — the debt instrument creates an obligation to repay principal plus interest, priced to compensate the lender for risk over the life of the bond.  Some of these risk factors (e.g., macro-fiscal policy, governance and transparency, and the legal and regulatory environment) are within the borrower's control; others, like global monetary policy or external shocks, are entirely outside it.

An evolving suite of “new” debt instruments — instruments with a quality dimension — respond to more than a country's economic position; they can help shape it, giving both borrowers and lenders more agency over a country's trajectory than the current Eurobond-dominated market allows.  For example, instruments with a quality dimension can incentivise borrowers to better manage the risk factors within their control or can adjust payment mechanics to account for the risk factors they don't control. Depending on structure, these instruments can shape a borrower's incentives, resilience, fiscal flexibility, cost of capital, and ultimately its development outcomes. 

Instruments with a quality dimension also react differently under stress. A debt stock made up entirely of rigid, undifferentiated instruments behaves very differently in a shock than one built from well-designed instruments even where debt-to-GDP ratios, borrowing costs and measured risk look similar on paper.

The quality dimension measures the extent to which an instrument's structure strengthens a sovereign's long-term capacity to invest, absorb shocks and sustain growth while maintaining market confidence. It's a property of the instrument design that incorporates (i) incentives aligned between borrower and lender; (ii) financing costs linked to measurable policy outcomes; (iii) proceeds directed towards productive investment; (iv) contractual mechanisms that absorb rather than amplify shocks; and (v) provisions that promote transparency and orderly debt work-outs.

Examples include sustainability-linked bonds and loans, which tie financing costs to policy outcomes, and labelled bonds, which direct proceeds towards productive investment. Instruments with pause clauses and other state-contingent features build resilience directly into repayment terms. GDP-linked bonds align debt service with a country's capacity to pay. Collective action clauses in bonds, majority voting provisions in syndicated loans, and enhanced transparency provisions improve coordination when shocks occur or debt treatment becomes necessary.

Once quality is understood this way, these “quality” instruments — usually treated as separate innovations, or as isolated financial products competing for niche market share — turn out to be different expressions of the same underlying idea. Together, they mark a shift in how sovereign debt itself is understood — from a traded commodity priced almost entirely on cost and default risk, to an institutional design, still tradeable, whose value also depends on the resilience and incentives it creates.

Where quality debt matters most

Quality debt plays a particular role for LICs and LMICs that also rely on or access concessional finance (e.g., from the World Bank’s International Development Association (IDA), the IMF's Poverty Reduction and Growth Trust or Resilience and Sustainability Trust, or bilateral donors)[2]. 

Whereas for emerging or developed markets that are financed entirely by the market, a conventional bond's risks are largely self-contained.  In contrast, where concessional and commercial financing sit in the same country’s debt portfolio, a rigid, shock-exposed Eurobond becomes everyone's problem.  This is because governments under liquidity strain divert scarce concessional resources to keep commercial creditors current rather than default and lose market access.  This is referred to as "leakage". It pulls concessional money away from the investment it was meant to fund.  For this group of borrowers, the quality of their market debt is not a separate question from their concessional relationships; it determines whether that concessional finance does its job.  Instruments with a quality dimension not only limit leakage but can also enhance the effectiveness of associated concessional finance. 

Despite this growing toolkit of “quality” debt instruments, and some recognition of the benefits that these instruments confer, conventional Eurobonds remain the instrument of choice for sovereigns across the income spectrum, including for new issuer LICs and LMICs.  This is because all issuers value the Eurobond’s standardisation, ease of access and, most of all, secondary market liquidity.  Eurobonds also play a valuable role in benchmarking corporate borrowing rates.  And there is a dedicated EM creditor base composed of high-yield investors that stands ready to fund frontier and emerging market borrowers so long as the price is right. 

But even where there is recognition of the benefits that these instruments confer to LIC and LMIC issuers – and more evidence becomes available to support this proposition[3] – several structural factors mean that this new suite of instruments will struggle to break through at scale. One reason is that sovereign borrowing decisions are traditionally assessed through two lenses: cost and risk. Per IMF guidelines, debt management offices aim to minimise borrowing costs subject to a prudent level of risk, while debt sustainability frameworks assess whether a country can keep servicing its obligations over time.  Both are essential, but they still miss a third dimension: quality.

A third dimension in sovereign debt assessment – measuring quality

This paper proposes a revised framework for analysing sovereign debt.  It retains the focus on cost and risk but adds “quality” as a third dimension — specifically for LICs and LMICs where a concessional component exists. 

The Cost–Risk–Quality (CRQ) framework

Every sovereign debt instrument should be assessed against three questions:

·       Cost – What is the financial cost of raising capital?

·       Risk – How does the instrument affect refinancing, market and fiscal risk?

·       Quality – Does the instrument strengthen long-term resilience, align incentives and improve the productive use of capital?

To be clear, this paper does not argue that “quality” is a substitute for cost and risk.  Indeed, investors, borrowers and policymakers alike may assume quality is already captured within the cost and risk formula – “the best quality instrument is the debt instrument I can issue for the lowest cost with acceptable risk”.  Embedded in that assessment are also questions such as whether the instrument will be sufficiently liquid, whether it will be rated, whether it will be index-eligible, and what issuing it will do to the sovereign's investor base — all of which feed into cost and risk.

But without the third dimension of quality recognised in the assessment, the cost-risk assessment alone will always tilt against greater uptake of so-called quality debt because the market structure does not reward quality.

Why quality isn't priced today

Today's sovereign debt architecture is good at measuring cost and increasingly sophisticated at measuring risk. It remains comparatively poor at recognising quality. Three structural obstacles explain why.

First, the institutions that assess sovereign debt aren't designed to recognise quality. Debt sustainability analyses and credit ratings primarily assess downside risk, not the forward-looking value created by better-designed instruments. A pause clause only demonstrates its worth when a shock occurs; sustainability-linked (KPI-based) financing only creates value if the policy outcome is achieved. Because these benefits are conditional and hard to quantify ex ante, they largely fall outside the analytical frameworks that shape borrowing decisions.

The IMF and World Bank's reform of the LIC Debt Sustainability Framework illustrates the point. Its proposed qualitative long-term module makes room for judgement about the long-term effects of climate adaptation and development investment on debt sustainability, but it remains focused on what borrowed funds finance, not on how the financing itself is structured. Two countries with identical debt stocks but very different debt architectures could therefore still be assessed as carrying equivalent risk. Even a reform built to accommodate judgement hasn't yet been asked to judge the instruments themselves.

Second, markets impose a liquidity tax on innovation. Conventional sovereign bonds benefit from deep secondary markets, standard documentation and established investor demand. Instruments with new contractual features typically start out as smaller, less liquid issues, and investors demand higher yields to compensate. Better quality can therefore look more expensive simply because the market underpinning it hasn't reached scale yet — a binding constraint on every innovation this paper points to.

Third, many borrowers lack the capacity to design higher-quality instruments. Sustainability-linked structures, pause clauses and other innovative instruments require legal, technical and financial expertise that many debt management offices — particularly in lower-income countries — cannot easily access.

The result is a self-reinforcing cycle. Frameworks reward low-cost borrowing; markets reward standardisation; capacity constraints favour familiar instruments. Countries therefore continue issuing debt optimised for today's assessment frameworks rather than tomorrow's resilience.

How to shift the cycle

Breaking that cycle requires four complementary reforms.

Risk assessments need to recognise quality. Debt sustainability analyses and credit ratings should explicitly recognise the resilience-enhancing characteristics of well-designed debt instruments. Without this, markets have little analytical basis for rewarding higher-quality debt.

Debt managers need a broader mandate to encompass quality. International guidance has long defined the objective of sovereign debt management as securing financing at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk — the cost-risk framework that has guided debt management for decades. That framework has served countries well, but it assumes debt can be fully evaluated through cost and risk alone — and this paper argues it cannot, since instruments also differ in the incentives they establish, the resilience they provide and the productive capacity they support.

Broadening the mandate doesn't mean abandoning cost and risk; it means adding quality as a third decision criterion. A slightly more expensive instrument that absorbs shocks, protects productive investment or better aligns borrower and lender incentives may deliver more value over its lifetime than the cheapest alternative. The task for policymakers shifts from minimising cost subject to risk to finding the best combination of cost, risk and quality — which in turn means developing practical ways to define and measure quality alongside the other two.

Quality needs scale. Standardised contractual provisions and early engagement with major institutional investors are essential if innovative instruments are to reach the liquidity needed to compete with conventional bonds. Debt managers need confidence that the market will value these instruments once they're brought to market — which likely requires a shift in mindset among governments and large financial institutions alike, not just better-designed products.

Investors need something tangible in return. Stronger transparency, better debt reporting and more consistent investor engagement help investors understand and value new contractual features. They also broaden the investor base, making sovereign financing itself more resilient.

The bottom line

Two countries can carry identical debt-to-GDP ratios, borrow at similar costs and face similar measured risks, yet have very different capacities to withstand the next shock because the quality of their debt is different.

Debt is not simply a liability to be financed:  its design shapes a country's resilience, incentives and long-term development prospects. The sovereign debt community has become increasingly sophisticated at evaluating cost and risk. The next step is to recognise quality as an equally important dimension. Bringing a Cost–Risk–Quality framework into debt management, debt sustainability analysis and market practice would not replace existing approaches; it would complete them.  Until debt is judged by its quality as well as its quantity, markets will continue to reward the cheapest debt, not necessarily the debt that best supports resilient and sustainable development.

[1] This Slaney Insight was written by Starla Griffin, Managing Director at Slaney Advisors and Head of Slaney Sustainable Finance at The Slaney Group. The Author would like to thank Sam Foxall, Ru Ferguson, Tobias Griffin, Arend Kulenkampff, David Mihalyi and Nyangasi Odowu for their reflections on this draft. Their thoughtful comments will be reflected in future Insights as we continue to develop the ideas presented here.

[2] For more discussion on this topic see: Griffin, S.: “Embedding Resilience in Eurobonds for Low-Income Borrowers:  Options for their Design and Introduction”, Finance for Development Lab. Policy Note. Link.

[3] See, Tom Hart, Andrea Carvajal, “The value of debt pause clauses”, ODI research report, 18 June 2026, Link; Arend Kulenkampff, “Nature as a Shock Absorber, A Financial Materiality Assessment of Forestry-linked Sovereign Indicators for Ghana”, NatureFinance/SSDH, 2025. Link; and, Interim report: “Embedding adaptation & resilience in Uganda’s sovereign debt dynamics and credit profile”, by a consortium of NatureFinance, Systemiq, LSE and Teal Insights in collaboration with the Uganda Ministry of Finance, Link.