KARACHI/LONDON, June 28 (Reuters) - The soothing calm and palpable enthusiasm in debt markets is deceiving. Developing and emerging economies, which suffered a large-scale withdrawal of international capital at the outbreak of the Covid-19 crisis, have seen investors return. But a rise in commodity prices and more favourable bond market conditions may provide only temporary relief. These countries will be hamstrung in their attempts to mobilise the resources necessary for a green and inclusive recovery that puts them back on a track to meet their climate and development goals. None of the problems of debt overhangs in poorer nations have been resolved. Risks continue to loom large, and for some countries a new round of debt issuances may further undermine debt sustainability. The International Monetary Fund is concerned that the recovery in advanced economies could lead to some overheating and eventually interest rate hikes that might trigger capital outflows and exchange-rate depreciations. Such developments would boost already-concerning levels of external debt across the developing world. Indeed, a U.S. interest rate rise could spell havoc for developing and emerging markets. Insufficient fiscal stimulus and slow progress in vaccinations will undermine poorer countries’ development prospects. The high cost of servicing debt is already impeding crisis responses and threatening the achievement of the Sustainable Development Goals, a global plan of action that aims to resolve the social, economic and environmental problems. In many developing and emerging countries, external public debt service is larger than healthcare and education expenditure combined. Moreover, elevated debt service levels are crowding out the room for crucial investments in climate resilience. Insufficient amounts of investment in climate adaptation and resilience will undermine both development prospects and public finances. Countries that fail to climate-proof their economies and public finances face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. The Common Framework for Debt Treatments that was agreed by the Group of 20 major industrial and emerging nations will not be enough to tackle the debt problem facing many developing and emerging economies. It excludes middle-income countries that may need debt relief, lacks incentives for meaningful participation by the private sector, and does nothing to promote a green and inclusive recovery. The international community, and the G20 in particular, need to agree on an ambitious agenda for tackling the debt crisis and providing countries with the fiscal space for crisis responses that are also environmentally friendly and that reduce inequality. IMF Managing Director Kristalina Georgieva and World Bank President David Malpass recognise this and have said their institutions will deliver a scheme for linking debt relief with green, resilient, and inclusive development at the climate change summit that is scheduled to be held in Scotland in November. Whatever they propose must result in significant debt relief for all countries in need, as well as real climate action that leaves no one behind. Against this backdrop, we have developed a proposal that achieves all these goals. Our scheme emphasises the need to enhance the Debt Sustainability Analysis carried out by the IMF and the World Bank to account for climate risks and the spending needed to invest adequately in climate resilience and other sustainable development goals. To facilitate negotiations on restructuring debt, we propose a Guarantee Facility for Green and Inclusive Recovery that would be managed by the World Bank. This facility would provide credit enhancements for new bonds that would be swapped for old debt with a significant haircut. Governments receiving debt relief would develop their own strategies to promote a green and inclusive recovery and commit to reforms that align their policies and budgets with the Sustainable Development Agenda and the Paris climate agreement. Some portion of the restructured repayments would be channelled into a new or already existing national fund that would be used to assist a green and inclusive recovery. The government would be free to decide how to spend the money from this fund, as long as it could demonstrate the plans would help achieve the sustainable development goals. Implementing this sort of debt relief would not only address short-term needs but also lay the foundation for more sustainable growth and development. It could also provide a stepping stone towards a new global debt architecture that is fair, transparent and efficient as well as taking account of the needs of developing and emerging countries. G20 countries need to be bold, and they need to act now. Past experience tells us that delaying the response to debt crises leads to worse outcomes and higher costs for debtors and creditors alike. Neither low- nor middle-income countries can afford a debt overhang during the most daunting crisis of generations. They should also not be hamstrung in responding to the unfolding climate crisis during the most important decade for resource mobilisation of our times. The world cannot afford to do too little too late while facing a planetary emergency. CONTEXT NEWS - Six economists and international policy specialists on June 28 published a proposal for comprehensive debt relief for overindebted low- and middle-income countries that would promote a green and inclusive recovery. - The authors of the report are Ulrich Volz, director of the Centre for Sustainable Finance at SOAS, University of London and a senior research fellow at the German Development Institute; Shamshad Akhtar, chair of the Pakistan Stock Exchange and a former Pakistani central bank governor and finance minister; Kevin P. Gallagher, director of the Boston University Global Development Policy Center and a professor of global development policy at Boston University; Stephany Griffith-Jones, director of the Financial Markets Program at the Initiative for Policy Dialogue at Columbia University; Joerg Haas, head of International Politics Division of the Heinrich Boell Foundation; and Moritz Kraemer, chief economist of CountryRisk.io and a senior fellow at SOAS, University of London.